Stocks Spike, Euro Tumbles As Draghi Jawbones Risk Higher Again

“The main message is ECB assets are set to expand as others contract,” promises ECB’s Mario Draghi, adding that “ABS buying is to begin shortly.” Shrugging off any rumors of mutiny or lack of sovereign QE, the markets bought every stock market and risky bond with both hands and feet. EURUSD plunged under 1.24 – its lowest since August 2012 as peripheral bond spreads tumbled 10-15bps.  US Treasury yields pushed higher and stocks knee-jerked higher. The USD index is now up 1% on the week.


The shine is coming off as reality hits



EUR tumbles sending bond yields and stocks higher… for now


and plunging peripheral bond spreads…


and this is what happened to gold…



Charts: Bloomberg

via Zero Hedge Tyler Durden

Obama to Seek ISIS War Approval, AC/DC Drummer Charged With Procuring Murder, Missouri Marriage Ban Struck Down: A.M. Links

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from Hit & Run

WTI Crude Tumbles Under $78 As OPEC Slashes Growth & Demand Expectations

While it has been obvious to many that the drop in oil prices is a weak demand issue (amid a desperate over-supply pump for revenues in a decling growth world), talking-heads have remain unashamedly bullish of growthiness and shrugged at commodities dumping at the fastest pace since Lehman. However, it appears OPEC just burst that little bubble of hope by slashing demand forecasts. Crude prices tumbled on the admission.


OPEC’s World Oil Outlook slashes GDP growth expectations from last year


With OECD demand tumbling


And the result…

via Zero Hedge Tyler Durden

Initial Jobless Claims Beats, 4-Week Average Nears 40-Year Lows

Despite a surge in job cuts, initial jobless claims beat expectations dropping to just 278k (the 2nd lowest of the cycle). The smoother 4-week average dropped to its lowest since April 2000 – nearing levels not seen since 1974… time for moar QE? Continuing claims also dropped to cycle lows… so why did the electorate “throw the bums out” yesterday?

Claims trend nears 40-year low


Chart: Bloomberg

via Zero Hedge Tyler Durden

Mario Draghi’s “There’s No Mutiny On The ECBounty” Press Conference – Live Feed

Having served up a large bowl of nothing with the official statement, the job of jawboning ‘hope’ for future monetary policy idiocy falls once again on Mario Draghi’s shoulders as he takes the stage in what may well be a highly contentious press conference. Will he admit the mutiny? Will he ‘fess up that OMT is a mirage? Will he remove his spectacles and angrily point at a reporter?




Press Conference begins at 830ET


via Zero Hedge Tyler Durden

And The World’s Most Powerful Person For The Second Year In A Row Is…

When it comes to the second coming of the cold war, things are not looking good for the leader of the “Free World”, because for the second year in a row, at least according to Forbes editors, the person whom they have chosen as the world’s most powerful in the world…

… is not the lame duck on the left.

From Forbes:

Our annual ranking of the World’s 72 Most Powerful People (one for every 100 million people on the planet) is based on voting by a panel of FORBES editors, who consider things like financial resources, scope and use of power, and the number of people they impact. (See full methodology here.)


This is not a lineup of the most influential or an anointing of the new establishment. It is an evaluation of hard power. We insist the people on our list wield the kind of power that shapes and bends the world, and moves people, markets, armies and minds. All of this, of course, is open to debate, and we welcome it. Join the conversation and leave your comments below.


This year’s list features 17 heads of state who run nations with a combined GDP of some $48 trillion. The 39 CEOs and chairs here control over $3.6 trillion in annual revenues. Among them are 14 founders, including the newcomer billionaires to the list, Alibaba’s Jack Ma and  Tencent’s Ma Huateng. Speaking of, this year’s class has 29 billionaires with a cumulative personal net worth valued in excess of $790 billion.

Below is the full list of Forbes’ Most Powerful People in the World 2014:

  1. Vladimir Putin
  2. Barack Obama
  3. Xi Jinping
  4. Pope Francis
  5. Angela Merkel
  6. Janet Yellen
  7. Bill Gates
  8. Mario Draghi
  9. Larry Page and Sergey Brin
  10. David Cameron 

via Zero Hedge Tyler Durden

Job Cuts Surge 68%, Most In 3 Years; Worst October Since 2009

Maybe this explains the election results? Challenger reports US companies laid off over 51,000 people in October, the most since May (and 2nd most since Feb 2013). This is a 68% surge MoM (and 11.9% rise YoY) – the biggest monthly rise since September 2011. Retail, Computer, and Pharma industries saw the biggest layoffs. Hiring also collapsed from the record 567,705 exuberance in September to just 147,935 in October. This was the worst October for layoffs since 2009.

Worst rise in layoffs in 3 years…


and worst October since 2009…


Chart: Bloomberg

via Zero Hedge Tyler Durden

Frontrunning: November 6

  • LOL@Fundamentals: European Stocks Fall as Investors Seek Stimulus Clarity (BBG)
  • Obama, Republicans sound conciliatory note but battles loom (Reuters)
  • Firms drop Pimco funds from managed accounts (Reuters)
  • Not All QE Is Created Equal as U.S. Outpunches ECB-BOJ (BBG)
  • Ukraine Accuses Russia of Sending Troops as Truce Wobbles (BBG)
  • Lenovo Slumps After Projecting China ‘Hypergrowth’ to End (BBG)
  • Palo Alto Networks discovers new malware targeted at Apple devices (Reuters)
  • IPO That Brought In $1 Billion in March Implodes in Denmark (BBG)
  • Leaked Documents Expose Global Companies’ Secret Tax Deals in Luxembourg (ICIJ)
  • Israel arrested UBS adviser, 13 others, in tax evasion investigation (Reuters)
  • NYC Trump Co-Op Dwellers Face Million-Dollar Bills (BBG)
  • Those Sunspots Approaching Earth Could Bring Blackouts (BBG)
  • Frash clashes in Hong Kong (Reuters)
  • Fastest-Growing Family Office Rides Rise in Ultra-Rich (BBG)
  • GM tells court it not liable for claims over pre-bankruptcy cars (Reuters)
  • Billionaire Enclave Prices Drop on Singapore Property Curbs (BBG)
  • Tax changes weaken case for new Pfizer bid, says AstraZeneca CEO (Reuters)


Overnight Media Digest


* U.S. prosecutors have launched a money-laundering investigation of a member of Vladimir Putin’s inner circle, escalating pressure on the Russian president’s billionaire supporters. The U.S. Attorney’s Office is investigating if Gennady Timchenko transferred funds linked to allegedly corrupt deals in Russia through the U.S. financial system. (

* In an acknowledgment of the Republican Party’s new dominance in Congress, President Barack Obama and Republican Senator Mitch McConnell, tentatively began charting a path forward on trade, taxes and other policy matters. (

* Benjamin Lawsky, New York’s superintendent of financial services is looking at expanding the use of independent monitors at banks and other firms as a way to prevent bad behavior. Such compliance specialists are in place as part of settlements of legal cases covering issues as varied as allegations of U.S. sanctions violations and mortgage-servicing abuses. (

* Inc tested package delivery by licensed cab in San Francisco and Los Angeles through the taxi-hailing mobile app Flywheel, in the company’s latest experiment to speed package shipments. (

* Leyne, Strauss-Kahn & Partners, the financial-services firm that was headed by former International Monetary Fund chief Dominique Strauss-Kahn and late financier Thierry Leyne, said on Wednesday that it is insolvent. (

* Altegrity Inc, the company that vetted Edward Snowden, is in talks with creditors to cut its roughly $1.7 billion in debt after losing key U.S. government contracts. Altegrity is trying to reach a restructuring deal with creditors ahead of a January interest payment that it may not be able to afford. (

* Anheuser-Busch InBev NV is launching a tequila-flavored beer called Oculto in the United States next year, aimed at younger consumers who increasingly choose liquor and Mexican beers. Earlier this year, Heineken USA began selling a tequila-flavored beer in Florida and Georgia called Desperados. (

* Orbital Sciences Corp said it would temporarily pay for rockets provided by another company to launch cargo into orbit for NASA, in the wake of last month’s launch failure of its own Antares booster. The company said it plans to pay for up to two such launches through 2016 to fulfill its commitments to the National Aeronautics and Space Administration (

* Investors pulled a net $48 billion from Pacific Investment Management Co.’s mutual funds in October following the departure of star manager Bill Gross, the fund research firm Morningstar said Wednesday. (



Banca Monte dei Paschi di Siena, Italy’s third largest lender, has approved a proposal to raise up to 2.5 billion euros ($3.12 billion) in a rights issue, after it emerged as the biggest loser in the European Central Bank’s annual stress tests last month.

Dominique Strauss-Kahn’s investment company, Leyne, Strauss-Kahn and Partners, has declared itself insolvent. The former head of the International Monetary Fund left the company last month after he became aware of “excessive borrowing” by the group.

ING Groep NV, the largest Dutch bank, said it would repay the last of its state aid ahead of schedule this week, signalling an extra dividend for shareholders as lending growth drove a jump in pretax earnings.

Financial Conduct Authority, the UK’s financial markets regulator, has fined three senior executives of insurance retailer Swinton Group a total of 928,000 pounds ($1.48 million) for presiding over a culture of high-pressure sales. Swinton’s former Chief Executive Peter Halpin has been banned from heading any financial services company in the future.


* With Republicans poised to control both the House and Senate next year, American business is gearing up for a major push on long-sought goals like an overhaul of the corporate tax system, building the Keystone XL oil pipeline, lighter environmental and financial regulation and winning congressional backing for trade deals with Asia and Europe. (

* A group of investigative reporters published findings on Wednesday accusing more than 300 companies, including PepsiCo Inc, Ikea AB and FedEx Corp, of benefiting from preferential deals with the government of Luxembourg. (

* Carlyle Group LP, the private equity firm, is teaming up with the British publisher Euromoney Institutional Investor Plc to acquire Dealogic Plc, a seller of financial data, for $700 million on booming stock sales, debt issuance and mergers. (

* ING Groep NV said it would repay the last of what it owes for a bailout during the financial crisis on Friday, six months earlier than expected. (

* Leyne, Strauss-Kahn & Partners, a Luxembourg investment firm formerly associated with Dominique Strauss-Kahn, was declared insolvent after the apparent suicide of his business partner last month and the discovery of previously unknown “financial commitments.” (

* The French government gave formal approval to General Electric Co’s $13.5 billion deal for the energy business of Alstom SA, the French power and transportation company. (

* The asset management arm of Perella Weinberg Partners is merging two subprime auto lenders that it owns as part of an effort to streamline their operations and expand market share. (




** Disgraced Peterborough Member of Parliament Dean Del Mastro abruptly resigned his House of Commons seat on Wednesday, less than a week after a judge found him guilty on three counts of violating the Canada Elections Act. (

** Honda Motor Co Ltd will announce on Thursday that it planned to invest about $800 million at its manufacturing plants in Alliston, Ontario, to improve their efficiency and position them for production of future models. (


** Quebec Premier Philippe Couillard is being criticized for not speaking French in a speech at a recent conference in Iceland. But Couillard snapped back that those taunting him should go to London or New York and see how far speaking French gets them. (

** Paul Rollinson, the chief executive of Kinross Gold Corp , said the company was unlikely to move forward with its much-anticipated Tasiast expansion project if gold prices did not rebound from their recent steep decline. (



– China’s Shanghai and Shenzhen stock exchanges said they had started a pilot programme to issue private placement bonds for merger and acquisition.

– China Communications Construction Co said it is looking into issuing preferred stocks. It did not give any details on the timing nor the size of the issuance.


– A total of 166 funds which manage below 50 million yuan ($8.18 million) in assets are at the risk of being liquidated, according to data by Wind Informational Statistics. Of these, 16 micro funds have assets below $10 million yuan.


– The number of couples who have applied to have a second child since China relaxed its family planning regulations last November is far lower than expected, the government said. Of the 11 million couples eligible to have a second child, just 6 percent, or about 700,000, have submitted applications, the National Health and Family Planning Commission said.

– The yuan is increasingly used by foreign companies to settle cross-border transactions and meet financing needs as China continues to internationalise the currency, the Bank of China said in a report. The yuan is used by 26 percent of foreign trading companies to settle more than 15 percent of their transactions.


– Latest data from private property developers confirm that new home sales accelerated considerably in October following the government’s stimulus policies, but doubts remain whether the upswing can be maintained until the end of the year. October new residential property sales in 30 cities rose 24.3 percent over September to 18.37 million square meters, according to E-House.

– Corruption involving collusion between government officials and business owners and executives remains the biggest challenge facing those involved in the campaign against bribery and fraud, according to the top anti-graft body.



Fly On The Wall Pre-Market Buzz


Domestic economic reports scheduled for today include:
Jobless claims for week of November 1 at 8:30–consensus 283K
Nonfarm productivity for Q3 at 8:30–consensus up 1.5%
Unit labor costs for Q3 at 8:30–consensus up 0.8%



CST Brands (CST) upgraded to Outperform from Market Perform at Wells Fargo
Inergy Midstream (NRGM) upgraded to Buy from Hold at Stifel
Santander Brasil (bsbr) upgraded to Neutral from Underweight at HSBC
Tableau (DATA) upgraded to Outperform from Sector Perform at RBC Capital
Willis Group (WSH) upgraded to Hold from Sell at Deutsche Bank


AcelRx (ACRX) downgraded to Neutral from Buy at Mizuho
American Eagle Energy (AMZG) downgraded to Market Perform from Outperform at Northland
American Electric (AEP) downgraded to Market Perform from Outperform at Wells Fargo
Coeur Mining (CDE) downgraded to Sell from Hold at Deutsche Bank
Duke Energy (DUK) downgraded to Hold from Buy at Deutsche Bank
Fiesta Restaurant (FRGI) downgraded to Neutral from Buy at Longbow
Hormel Foods (HRL) downgraded to Market Perform from Outperform at BMO Capital
IntercontinentalExchange (ICE) downgraded to Hold from Buy at Deutsche Bank
Ironwood (IRWD) downgraded to Sell from Hold at Cantor
Lloyds Banking (LYG) downgraded to Market Perform from Outperform at Bernstein
ProAssurance (PRA) downgraded to Market Perform from Outperform at Raymond James
Rex Energy (REXX) downgraded to Neutral from Outperform at RW Baird
Solazyme (SZYM) downgraded to Market Perform from Outperform at Cowen
Solazyme (SZYM) downgraded to Neutral from Outperform at RW Baird
Solazyme (SZYM) downgraded to Sector Perform from Outperform at Pacific Crest
Sykes Enterprises (SYKE) downgraded to Neutral from Outperform at RW Baird
Tangoe (TNGO) downgraded to Hold from Buy at Stifel
Tangoe (TNGO) downgraded to Market Perform from Outperform at Raymond James (WWWW) downgraded to Neutral from Overweight at JPMorgan
Wisconsin Energy (WEC) downgraded to Market Perform from Outperform at Wells Fargo


Dycom (DY) initiated with a Market Perform at Wells Fargo
NPS Pharmaceuticals (NPSP) initiated with a Buy at CRT Capital
Ruckus Wireless (RKUS) initiated with an Outperform at RBC Capital
Vertex (VRTX) initiated with a Buy at CRT Capital


Perrigo (PRGO) to acquire Omega Pharma NV for EUR 3.6B
Plains All American (PAA) to acquire 50% interest in BridgeTex from Occidental (OXY) for $1.08B
CBS (CBS) CEO said ‘fairly definitively’ will have Showtime streaming service in 2015
Siemens (SIEGY) said it will sell hearing aid business to EQT for EUR 2.15B
Tesla (TSLA) said 50,000 Model S deliveries in 2015 is ‘no problem,’ said expects Model X deliveries to start in 3Q15
American Capital (ACAS) said it plans to split into three companies
Palo Alto Networks (PANW) revealed discovery of unprecedented iOS, OS X malware (AAPL)


Companies that beat consensus earnings expectations last night and today include:

CBS (CBS), News Corp (NWSA) AstraZeneca (AZN), CECO Environmental (CECE), Oncolytics Biotech (ONCY), Carrizo Oil & Gas (CRZO), Mitel (MITL), Cyan (CYNI), TRI Pointe Homes (TPH), CDW Corporation (CDW), Prestige Brands (PBH), Tarena (TEDU), AES Corp. (AES), GAIN Capital (GCAP), U.S. Concrete (USCR), Taminco (TAM), Swift Energy (SFY), Calpine (CPN), Walker & Dunlop (WD), Amerseco (AMRC), Higher One (ONE), Gran Tierra (GTE), Civeo Corp. (CVEO), Globe Specialty Metals (GSM), Middleby (MIDD), Kindred Healthcare (KND), Delek US (DK), Rand Logistics (RLOG), Alamo Group (ALG), Alamo Group (ALG), Ormat Technologies (ORA), PTC Inc. (PTC), Gentiva Health (GTIV), Concho Resources (CXO), Matador (MTDR), Regency Energy Partners (RGP), Energy Transfer Equity (ETE), LivePerson (LPSN), China Biologic (CBPO), Sun Life Financial (SLF), Schweitzer-Mauduit (SWM), JBT Corporation (JBT), Blueknight Energy Partners (BKEP), Murphy USA (MUSA), Kinross Gold (KGC), Southwest Gas (SWX), Belmond Ltd (BEL), SP Plus Corp. (SP), Ashland (ASH), Atmos Energy (ATO), Bacterin (BONE), Golden Star Resources (GSS), MBIA (MBI), Tronox (TROX), LHC Group (LHCG), Heritage Insurance (HRTG), (STMP), Blucora (BCOR), US Ecology (ECOL), Plains GP Holdings (PAGP), AVG Technologies (AVG), Kennedy Wilson (KW), Coeur Mining (CDE), Liberty Global (LBTYA), W&T Offshore (WTI), Convergys (CVG), Sunoco Logistics (SXL), Sierra Wireless (SWIR), , PennyMac Financial (PFSI), InnerWorkings (INWK), American Water (AWK), Babcock & Wilcox (BWC), Textura (TXTR), Autobytel (ABTL), QEP Resources (QEP), ChemoCentryx (CCXI), Callon Petroleum (CPE), Zillow (Z), Anworth Mortgage (ANH), Polypore (PPO), MarkWest Energy (MWE), OraSure (OSUR), Artesian Resources (ARTNA), DCP Midstream (DPM), DCP Midstream (DPM), Metabolix (MBLX), CenturyLink (CTL), DealerTrack (TRAK), Depomed (DEPO), SolarCity (SCTY), Marin Software (MRIN), Envision Healthcare (EVHC), Aerohive (HIVE), SpartanNash (SPTN), CTPartners (CTP), Planar Systems (PLNR), Approach Resources (AREX), Natures Sunshine Products (NATR), (WWWW), Gulfport Energy (GPOR), Tutor Perini (TPC), Intralinks (IL), American Eagle Energy (AMZG), Alexander & Baldwin (ALEX), Ixia (XXIA), TESARO (TSRO), Ocean Rig UDW (ORIG), Maiden Holdings (MHLD), Nanosphere (NSPH), Box Ships (TEU), Quality Distribution (QLTY), Intersect ENT (XENT), EnerSys (ENS), Tableau (DATA), PowerSecure (POWR), Tesla (TSLA), Silver Spring (SSNI), GSI Group (GSIG), Endocyte (ECYT), Skullcandy (SKUL), Franco-Nevada (FNV), Cornerstone OnDemand (CSOD), Symantec (SYMC), Whole Foods (WFM), LDR Holding (LDRH), Alnylam (ALNY), VIVUS (VVUS), Foundation Medicine (FMI)

Companies that missed consensus earnings expectations include:

Dorian LPG (LPG), Chesapeake Utilities (CPK), Fuel Systems (FSYS), Perrigo (PRGO), Cinemark (CNK), Olympic Steel (ZEUS), Generac (GNRC), Teekay (TK), Randgold (GOLD), Teekay Tankers (TNK), Ellington Financial (EFC), Energy XXI (EXXI), Andersons (ANDE), Garrison Capital (GARS), TeleTech (TTEC), Brookdale Senior Living (BKD), Sunoco (SUN), BioDelivery reports Q3 EPS (51c), Genworth (GNW), Energy Transfer Partners (ETP), ION Geophysical (IO), TerraForm Power (TERP), Ensign Group (ENSG), Baltic Trading (BALT), Oiltanking Partners (OILT), Jones Energy (JONE), Tenaris (TS), BioScrip (BIOS), Markel (MKL), Masonite (DOOR), TetraLogic (TLOG), Ladder Capital (LADR), Regado Biosciences (RGDO), Dynegy (DYN), Aveo Pharmaceuticals (AVEO), Craft Brew (BREW), Mattersight (MATR), Mattersight (MATR), Matrix Service (MTRX), Western Asset Mortgage (WMC), Cross Country Healthcare (CCRN), Cenveo (CVO), Novavax (NVAX), CrossAmerica (CAPL), Brookdale Senior Living (BKD), SunEdison reports Q3 EPS ($1.91), Points International (PCOM), Alexza Pharmaceuticals (ALXA), Providence Service (PRSC), Regulus Therapeutics (RGLS), Prudential (PRU), Antero Resources (AR), SunEdison (SUNE), Hannon Armstrong (HASI), Fox Factory (FOXF), Solazyme (SZYM), Thoratec (THOR), Tangoe (TNGO), McDermott (MDR), Molycorp (MCP), Molycorp (MCP), Hutchinson Technology (HTCH), XPO Logistics (XPO), CF Industries (CF), Insulet (PODD), TearLab (TEAR), DryShips (DRYS), Safe Bulkers (SB), ProAssurance (PRA), Meadowbrook Insurance (MIG), Numerex (NMRX), Immunomedics (IMMU), Wright Medical (WMGI), WebMD (WBMD), Qualcomm (QCOM)

Companies that matched consensus earnings expectations include:

Natural Gas Services (NGS), MiX Telematics (MIXT), New Mountain Finance (NMFC), Air Transport Services (atsg), Paragon Shipping (PRGN), Exar (EXAR), Continental Resources (CLR), Genpact (G), Annaly Capital (NLY), Chefs’ Warehouse (CHEF), Axcelis (ACLS), TrueCar (TRUE), Roundy’s (RNDY), Roundy’s (RNDY), Noodles & Company (ndls), EVERTEC (EVTC), Ruth’s Hospitality (RUTH), MediWound (MDWD)


AstraZeneca (AZN) CEO says tax revisions cripple new Pfizer (PFE) offer, Reuters reports
Apple (AAPL) may be planning glasses-free 3D display for next iPhone, MacRumors reports
RBS (RBS) retreat could include central and eastern Europe, FT reports
Agrium (AGU) to cut 500 jobs, sell some businesses, Reuters reports
Amazon (AMZN) exec says company “undeterred” by Fire Phone performance, Business Insider reports


Booz Allen (BAH) announces sale of 10M shares of Class A common stock by holder
LDR Holding (LDRH) files $150M mixed securities shelf, 2.M shares for holders
Mast Therapeutics (MSTX) files to sell equity securities
Nevro (NVRO) 7M share IPO priced at $18.00
Rocket Fuel (FUEL) files to sell 3.7M shares for selling stockholders
TrueCar (TRUE) plans to offer 1M shares of common stock
TrueCar (TRUE) plans to offer 5.4M shares for holders
Western Digital (WDC) files to sell 5.4M shares for Viviti Technologies

via Zero Hedge Tyler Durden

ECB Keeps Rates Unchanged

While today’s Draghi press conference is expected to be rather contentious, nobody was expecting much if anything from the actual quantitative rates announcement. Sure enough, that’s precisely what the ECB delivered when moments ago it announced it would keep all three rates unchanged, with the Deposit Facility rate continuing its trek through NIRP land at -0.20%.

From the ECB:

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.05%, 0.30% and -0.20% respectively.


The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 2.30 p.m. CET today.

Next up: the press conference in 45 minutes.

via Zero Hedge Tyler Durden

Prepares For ECB Disappointment: ‘We Do Not Expect Any Additional Easing To Be Announced”, Goldman Warns

Yesterday, in the “ECB Matrix” we showed what the probable outcomes out of today’s “most anticipated ever” ECB meeting could be, alongside some suggestions from DB on what the best “delivery” and “disappointment” trades could be. For those who missed it, here it is again.


Disappointment trades

  • On this simplistic risk-reward perspective iTraxx Main spread wideners, long euro/usd and Bund ASW wideners offer the best risk-reward for ECB disappointment trades.

Delivery trades

  • The conclusion regarding ECB delivery is a bit more complicated. If
    we ignore 10Y Bunds which could rally if the ECB announces a broad based
    QE including government bonds we are left with 2Y Euribor-OIS
    spread tighteners, long 2Y1Y inflation swaps (which might remain under
    pressure due to the decline in oil prices) and paid positions on the
    long-end of the EUR curve


But since nobody knows better what the former Goldman Sachs head of the ECB will do than Goldman, here is Goldman’s preview of today’s ECB announcement:

Reflections on ECB sovereign QE and Asset Prices

  • The ECB’s press conference is the main event today. We expect no changes in policy.
  • Our baseline case calls for ongoing ‘credit easing’ measures through private assets.
  • Over time these should support the recovery and a rebuild of inflation expectations.
  • Consistently, we forecast a modest but sequential pick-up in GDP growth after the Q3 lull.
  • We see a 1-in-3 chance that the ECB will launch sovereign QE …
  • … reflecting the probability of a downside scenario for economic activity.
  • We would expect sovereign QE to operate mainly through expectations and portfolio rebalancing channels.
  • Tighter long-dated intra-EMU spreads, and a weaker EUR, would be the most direct ways to capitalize on this.
  • While the latter is already part of our market strategy, low growth, financial fragmentation and political uncertainties have been headwinds to spread compression.
  • These factors have kept us neutral on spread direction since the Summer.
  • Looking into 2015, the case for a flattening of EMU peripheral yield curves deserves attention given the high premium.

1. Overview

The key event today is the ECB’s press conference. It comes at a time when media reports have highlighted tensions within and around the Governing Council’s policy stance. One of the points of friction appears to be related to the public suggestions by part of the central bank’s leadership that EMU countries that have room to expand fiscal policy should use it.

Although the ECB’s comments on fiscal matters may have interfered with delicate political balances between EMU Member States, we think that a relaxation of the structural fiscal stance is appropriate with monetary policy at the zero bound. And it is what our European Economics team has built into our baseline growth forecasts, based on fiscal plans announced by the main EMU members.

Back to today’s policy meeting, we do not expect any additional easing to be announced in addition to the various measures adopted between June and September. We expect Mr Draghi’s remarks to be focused on the Comprehensive Assessment of Euro area banks, and on the fact that the decline in oil prices is lowering headline inflation in most advanced economies.

Our base case has long been that ECB purchases would be concentrated in Asset Backed Securities and, possibly, be extended to other eligible assets, such as supranational bonds, and private bonds. Consistently, we still assign only a 1-in-3 chance to large-scale purchases of EMU area government bonds. Such subjective probability reflects the odds of the Euro area economy not responding positively to the measures in support of private credit already administered, and hence requiring a heavier and quicker boost. In the event, we think the ECB would be willing to bear the high political ‘fixed cost’ of engaging in sovereign QE in order to fulfil its inflation mandate.

In today’s Daily, building on questions we frequently receive from our clients, we sketch out some of the market issues surrounding sovereign bond purchases in the Euro area, should the ECB decide to take a turn in this direction against our central case. We comment on four aspects in particular: 1) is sovereign QE priced, 2) if implemented how it would look, 3) what would the transmission channels be, and 4) what could be the broad asset price response. We would expect sovereign QE to operate mainly through expectations and portfolio rebalancing channels. Tighter long-dated intra-EMU spreads, and a weaker EUR, would be the most direct ways to capitalize on this, alongside a broader easing of financial conditions.

A lower EUR/US$ is already part of our market strategy, as we believe it will be also helped by higher Dollar real rates. Looking into 2015, the case for a bull-flattening of peripheral EMU spread curves would be supported by our baseline economic case, and in the event of sovereign QE. However, current low growth, residual financial fragmentation across the Euro area and political uncertainties still weigh on peripheral EMU bond markets. We recognize that we are at an important inflection point both in the economic cycle and the fiscal/monetary policy stance, and we reiterate our neutral recommendation on spread direction.

2. Are ECB sovereign purchases already priced in?

The term structure of ECB policy rates, as captured by the EONIA curve, is very low and flat. The current 5-year EONIA yield trades at 11bp, while the 5-year rate in 5-years time stands at 130 – well below the expected rate of Euro area inflation at that horizon, currently at 1.8% (this implies that 5-year 5-year forward EUR real rates are negative to the tune of 50bp). On our analysis, such depressed level of future yields largely reflects the ECB’s policy of negative overnight deposit rates, and ‘forward guidance’. The latter is reinforced by the possibility afforded to Euro area banks growing their loan books to lock in funding rates at 15bp out to 4-years, which, in turn, has contributed to the flattening of the yield curve. Therefore, low rates and a flat curve provide per se no conclusive evidence that large-scale purchases are ‘in the price’.

In peripheral EMU bond markets, by contrast, the term structure of interest rates is very steep, as we documented in a recent Global Markets Daily, which compares sovereign spreads in Italy and Germany. Using updated figures, the differential between Germany on the one side and the average of Italy and Spain on the other goes from 65bp at the 2-year maturity to 235bp at the 10-year in 10-years’ time horizon. Cross-country spreads at these longer maturities have all but widened since April, when the ECB introduced its policy statement that ‘unconventional instruments’ (i.e., QE) could be deployed. This would also suggest that government bond purchases are not being fully discounted.

Persistently high long-dated intra-EMU spreads reflect a combination of factors, including (i) credit risk, as reflected in the large and growing (according to IMF projections) differential in public debt ratios between Germany on the one side and Italy Spain on the other, and (ii) a fragmentation in Euro area financial markets, where more than two-thirds of all the public debt of Italy and Spain is now held by domestics, with the ‘home bias’ on longer-maturity bonds anecdotally higher.

3. How would sovereign QE be carried out?

The stock of Euro area sovereign bonds is around EUR7trn. The US, UK and BoJ have bought the equivalent of 20% of their respective stocks of public debt over an average of 3-4 years. Crudely applying this ratio to the Euro area would lead to purchases of EUR400-500bn per annum. Should the ECB decide to undertake sovereign QE, our European Economists would expect it to act boldy, exploiting announcement effects.

Given how low front-end rates already are (the 1-year rate in 2-years’ time in Italy trades at 1.2%, and zero in Germany), the maximum impact of sovereign purchases along this dimension would be achieved through the removal of duration risk from private hands – a key aspect of the Fed’s QE3 and the BoJ’s current policy. The international experience suggests that central banks tend not to restrict purchases up to a certain maturity in order to avoid distorting the sovereign yield curve (the Bank of England did so at its first attempt at QE in 2009, when it announced it would purchase bonds with residual maturity between 5- and 25-years; but soon switched to all bonds with maturity beyond 3-years).

As for the country allocation of the purchases, the criterion would likely be the ECB’s capital key. This is not without issues, however. How to deal with countries that are still under a stabilization program would be a point of contention. A good chunk of the debt of countries that have recently emerged from a program (Ireland, Portugal) is in the form of non-tradable official sector loans. Other EMU countries have relatively small bond markets, given the size of their economy. Finland provides a fitting example: with EUR500bn-worth of total purchases, the ECB would completely absorb the estimated gross issuance of Finnish bonds for an entire year. Anomalies in the relative pricing of EMU sovereigns along cross-country lines would be likely.

4. What would the transmission channels be?

Empirical evidence from other experiences of sovereign QE suggests that the impact of bond purchases tends to be front-loaded, when the size of the program, or the objective to which this is tied (e.g., ‘until inflation returns to target’, as in Japan) is announced, rather than when the purchases are actually carried out. A rapid expansion of the ECB’s balance sheet would lead to a faster decline in the EUR, particularly against the Dollar, helping reflate the economy.

Countries that adopted sovereign QE in recent years ran primary (i.e., net of interest payments) budgetary deficits. The average of the US, UK and Japan for the period 2009-13 was around 7.5% of GDP. The monetary expansion therefore interplayed with the looser fiscal policy stance, lowering funding costs and leaving more room for banks and other domestic financial institutions to accumulate other assets (including cash balances) rather than government bonds (see, for example, the small increase in government bonds relative to total assets held by US and UK banks in the wake of the Great Recession relative to the historical norms post downturns).

By contrast, in the Euro area, two of the main beneficiaries of sovereign QE – Germany and Italy – are both running primary surpluses. Unless the fiscal stance is relaxed much more than we anticipate (which could be conceivable in a scenario of deep supply-side reforms, but unlikely), the transmission to asset prices and the real economy would come through a combination of expectation shifts and portfolio rebalancing effects.

As Huw Pill and Dirk Schumacher have argued, sovereign QE would entail risk transfers among taxpayers of the different EMU constituents through the ECB’s balance sheet. Relative to the experience of other countries, this ‘risk sharing’ characteristic of open-market operations would magnify the effect of the policy. Relatedly, government bond QE would likely lead to upgrades in sovereign ratings.

ECB purchases of government bonds would also increase the fungibility of longer-dated securities across the major EMU issuers, and encourage a broadening of demand. Using Italy and Spain as an example, part of the stock of public debt currently held by domestic financial institutions would probably be sold to the ECB. Concomitantly, foreign ownership – estimated at around 30% of the stock – would expand, and its composition would likely see an increased participation of Asian investors.

5. What would the main implications for macro asset prices be?

Should the ECB engage in sovereign QE, the main macro asset price response would likely include:

  • A tightening in EMU spreads, with a large part of the adjustment coming from a decline in peripheral rates. For reference, 10-year yields 10-years forward in Italy and Spain, currently trading at 515bp and 415bp respectively, would likely experience the largest drop relative to Germany (230bp). Estimating by how much rests on a number of key assumptions (relative size and distribution of the purchases, the response of debt management offices, intervening changes in the domestic policy stance).
  • A slight steepening in the nominal term structure of EONIA, also reflecting an increase the market price of inflation. We would envisage a gradual rebuild of term premium in the German bond market.
  • A decline in the Euro, particularly against the USD, which continues to trade slightly expensive relative to long-run ‘fair value’ estimates.

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Perhaps focus on those “disappointment” trades, then?

via Zero Hedge Tyler Durden