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3 Jun 2014
Coming to a cross-road, ECB coming up - Rabobank
FXStreet (Guatemala) - Analysts at Rabobank noted that the second quarter has seen the return of an old acquaintance: the "Great Flotation", where (the prospect of) abundant liquidity has propped up market valuations of assets of all sorts and kinds.
Key Quotes:
“European corporate and sovereign spreads are trading at the tightest levels so far this year, whilst core 10 year German Bund yield are just 20bps shy of their all-time low. Let alone the levels at which equities across the globe are trading”.
“The reason, of course, is well known: central bank largesse”.
“This time it is the ECB that is calling the shots”.
“On Thursday it is likely to announce a "comprehensive" package of monetary easing measures to strengthen the pass-through of its policy stance to financial markets and the real economy, to weaken the euro and, hopefully, limit any further downside risk to inflation over the medium term”.
“This week’s eurozone inflation data have only further cemented that , expectation. However, don’t overlook the Fed. Although the latter has continued to taper its asset purchase program, it has maintained great caution so as not to stoke fears of a preliminary rate rise. Recent pockets of weakness and remaining economic slack are at the roots of that policy stance, a familiar theme that resembles the taper/no-taper approach the Fed followed throughout 2013”.
“Markets have already priced in a great deal in terms of rates staying low for a long period of time”.
“The exception, perhaps, is a full-blown QE programme by the ECB – at least if we were to gauge this from eurozone sovereign spreads. This situation certainly does beg the question what happens in a scenario where US growth steps up another gear and where inflation starts to reverse on both sides of the Atlantic. It could well take us back to the crossroads that the market faced late 2013. Will it be fundamentals or will it be liquidity? Which way shall we go?”.
Key Quotes:
“European corporate and sovereign spreads are trading at the tightest levels so far this year, whilst core 10 year German Bund yield are just 20bps shy of their all-time low. Let alone the levels at which equities across the globe are trading”.
“The reason, of course, is well known: central bank largesse”.
“This time it is the ECB that is calling the shots”.
“On Thursday it is likely to announce a "comprehensive" package of monetary easing measures to strengthen the pass-through of its policy stance to financial markets and the real economy, to weaken the euro and, hopefully, limit any further downside risk to inflation over the medium term”.
“This week’s eurozone inflation data have only further cemented that , expectation. However, don’t overlook the Fed. Although the latter has continued to taper its asset purchase program, it has maintained great caution so as not to stoke fears of a preliminary rate rise. Recent pockets of weakness and remaining economic slack are at the roots of that policy stance, a familiar theme that resembles the taper/no-taper approach the Fed followed throughout 2013”.
“Markets have already priced in a great deal in terms of rates staying low for a long period of time”.
“The exception, perhaps, is a full-blown QE programme by the ECB – at least if we were to gauge this from eurozone sovereign spreads. This situation certainly does beg the question what happens in a scenario where US growth steps up another gear and where inflation starts to reverse on both sides of the Atlantic. It could well take us back to the crossroads that the market faced late 2013. Will it be fundamentals or will it be liquidity? Which way shall we go?”.