The European Central Bank (ECB) cut interest rate by 10bps to -0.5% and restarted its quantitative easing (QE) program from November, sending equities broadly higher overnight.

It is worth taking note that this round of QE is ‘open-ended’, as the bank says it will keep interest rates low and continue asset purchasing for ‘as long as it takes’ to bring inflation rate back to its targeted 2% level. Bond yields rose in developed Eurozone countries and declined in PIGS (Portugal, Italy, Greece, Spain).

Big swing in currencies and precious metal prices were observed after the ECB decision, reflecting the markets’ struggle to digest the news with significant re-positioning taking place. EUR/USD initially dived below 1.093 and quickly bounced back to 1.106 area. This may be due to profit taking and short-covering activities.

The ECB’s dovish move set an example to other central banks to cut rates faster, accelerating a competitive currency depreciation race globally. It also means more negative yielding bonds will emerge in the months to come, making the capital market even more distorted than before. Investors needs to be more aggressive in yield-hunting as more money out there in the market will be for a limited amount of quality assets.

The White House is having a debate on the proposal of an interim trade deal with China; exchanging tariff relief with an agricultural deal and intellectual property commitments. President Trump is open to this option but has also said he prefers a long-term deal.

The Trump administration is getting more concerned about adverse economic impact of a dragging trade war on US consumers and corporates in the upcoming holiday season, and its implication on the Presidential election next year. A compromise on the trade deal serves as a good opportunity to step back and de-escalate the trade disputes.

Crude oil prices fell for a second day as traders tried pricing in the prospect of Iran sanctions removal following John Bolton’s departure from the White House. President Trump is expected to turn a lot more dovish on Iran and North Korea. As Iran’s oil capacity accounts for around 2-3% of global crude oil supply, a sanction relief means oil prices will become a lot cheaper than it is now.

 

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