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Although it is being extended, the ECB purchasing program is lowered in its size, upsetting investors’ views

12 December 2016

Italian referendum results matched polls, and that could almost be viewed as a surprise! As we highlighted repeatedly, the outcome was widely anticipated by investors, thus market impact was logically tiny, not to say non-existent. It does not mean that there are no medium term implications, but for the time being, markets are not focused on them.

ECB meeting was the second event this week, and we had a bit of a surprise. Markets were expecting 6 months extension with unchanged amount. They had 9 months but with smaller amount (EUR60bn instead of EUR80bn, starting from march). No increase in purchases of non CAC bonds, but a possibility to buy below ECB depo rate. This was first taken as a hawkish move: bonds sold off, but they came back very quickly.

Since the meeting, here are the moves:

  • Bear periphery on longer dated maturities  that’s logical since below deposit rate purchases are more positive for the short end, while the long end will get less bids, as well due to the fact that non CAC bonds purchases have not been increased
  • Bear Euro  that’s the most puzzling reaction at first sight, but it is probably explained by lower short term rates
  • Bull Euro equity and banks  logical for banks, since yield curves have steepened. That’s less clear for Euro equities, but they benefit from solid activity data recently, a weaker Euro and some uncertainties now being behind us

In short, there is a bull market on equities, including – and that’s new – Euro equities. Bonds are still oversold, and the dollar is stronger, more than ever.

What do we think?

  • Still the same on bond yields: in the US, inflation looks properly priced and investors euphoria regarding Trump seems at least premature to us. On the Euro curve, we continue to think that yields are still too low
  • Regarding equity markets, we continue to deem US too expansive, and earnings growth should be reviewed on the downside (+12% EPS growth expected for 2017). Here again, Trump effect looks more than priced in. Euro area equities should continue to behave well if Euro keeps its downtrend.
  • Last, regarding FX, we still cannot share investors dollar hype… for reasons we have repeatedly argued.

Next week we have the US federal reserve, with almost no uncertainty. The speech will probably have some interest though.

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