CB President Mario Draghi and the European Central Bank finally joined the QE party yesterday, albeit reluctantly, and despite obvious German misgivings, and the crossing of a few red lines, may well have bought EU leaders some more time
with which to enact the essential structural reforms required to break the sclerotic European economy out of its current difficulties.
Having promised to do whatever it takes in 2012 the ECB has finally had to put its money where its mouth is,
despite bond yields already being at record lows. The key question now is whether it will be enough, and on this score history is not on the ECB’s side.
While the program has had the inevitable effect of pushing stock markets sharply higher and the euro off a cliff,
it remains doubtful that this extra cash will make that much difference, despite all the siren calls for action to be taken, over the past few weeks.
Quite simply, the banking transmission mechanism in the euro area continues to remain impaired
, and until that is fixed a lot of this cash is unlikely to trickle down to where it is needed.
As things stand banks currently have no incentive to sell any sovereign bonds they hold while they are still trying to build up their balance sheets, and while the ECB is charging a negative deposit rate.
Furthermore if the political will was there to reform, surely French and Italian politicians would have made greater progress than they currently have
in making the changes needed to help boost growth in their respective economies.
If anything the continuing slide in the oil price is likely to have more of an economic benefit
than yesterday’s measures.
The announcement overnight of the death of the Saudi king has invited speculation about the possibility of a change in the current Saudi policy of allowing oil prices to fall
to reach their natural level, with a sharp rally higher, but any change in policy seems unlikely at this point.
For now though investors look set to take the money and run with European markets set to open higher as we head into the weekend and the uncertainty of the Greek election.
Mr Draghi was at pains to send a coded message to Greek politicians and the voters yesterday
when he said that the ECB would still be at their disposal, but the country had to abide by the conditions of their bailout plan, and that meant doing as they are told.
Despite yesterday’s unexpectedly bold actions the latest German and French manufacturing and services PMI’s for December are expected to show modest improvements
. German manufacturing is expected to improve to 51.7, though the French PMI is expected to remain weak at 48, while the services numbers are expected to come in at 52.5 and 50.8 respectively.
Over in the UK the focus shifts back to the consumer
where we will see how much the scrum of the Black Friday November sales brought forward a lot of the December pre-Christmas spend We saw November’s numbers surge to 1.6%, way above expectations, and the price for that could well be a decline of 0.6% in the December numbers
Even if we do get a sharply negative number this morning it will have to go some to register a negative number for Q4, given that the combined total for October and November sits at a rise of 2.4%.
– yesterday’s break below 1.1460 now opens the risk of a direct move towards 1.1205, which is 61.8% retracement of the entire move from the 0.8230 lows and the 2008 highs at 1.6020. Any rebound looks likely to find resistance at 1.1470 and this week’s high at 1.1680.
– the fall through 1.5035 has brought the pound lower again and we look set to retest the lows last year at 1.4810, on a break below interim support at 1.4980. To get any chance of a rebound we really need to see a move through the highs this week at 1.5140.
– having seen the euro break below the 0.7590 level the likelihood is we could well be set for a move towards 0.7400 initially and then towards 0.7255, which had originally been the peaks seen in 2003.
– the US dollar seems to be finding a range between 117.00 and 119.00 and while we could see a retest of the 120.00 level, we could equally retest the recent lows. The key support remains just above the 115.60 level which is also potential neckline support for a forming head and shoulders pattern. A break of 115.60 could well see a sharp fall towards 110.00..
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