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Afternoon analysis 02.10.2014

2 Oct 2014 17:22|Artur Wiszniewski

Details on the ECB assets purchases program was taken with visible skepticism by investors what resulted in drop of the dollar and stocks. The zloty was stable.

Unveiled details on the European Central Bank asset-backed securities and covered bonds purchases were taken with skepticism by investors. Program rules were published on 15.30. The ECB didn't give upper limit of the purchases. In addition, it deferred from softening requirements on asset quality, what was expected by some commentators.

During a press conference Mario Draghi said it's not certain whether the ECB will expand its balance sheet by one trillion euros. In September the ECB president said that monetary authorities plan to drive balance sheet to 2012 levels. Draghi reiterated that ECB will buy transparent and simple ABSs to provide credit for small and medium entrepreneurs.

On the exchange rate Draghi said that although growth and price development are imporant , it remains beyond ECB goals.

Mario Draghi didn't exclude possibility of full blown quantitative easing what encompasses although he provided veiled answer to this question government bond by warranting it on price developments. He also reiterated that monetary authorities may use unorthodox measures if needed.

With respect to inflation expectations Draghi said that the ECB uses few measures which show subdued outlook for prices. The undertaken actions are aimed at lifting up expectations.

The European Central Bank decided to leave interest rates unchanged at the lowest level in history. The main rate remained at 0.05 percent and deposit facility rate stood at minus 0.2 percent.

Data push to action

This week's data supported the case for ECB additional actions. The core inflation growth stood at 0.7 percent, lower from 0.9 percent in the previous month, according to Eurostat flash estimate. The consumer inflation stood near its five-year lows. In addition, the unemployment rate remained record high and manufacturing PMIs showed deterioration of business activity. The inflation data followed the European Commission report that showed deterioration of business sentiment and lowering inflation expectations.

The ECB cut interest rates at record low, allotted 82.6 billion euros in TLTRO tender and launched ABS purchases. The central bank didn't accomplish its goal of restoring growth and warding off deflation.

Currently the full blown QE is the last measure remaining in ECB's arsenal. Given the strong defiance from the German Bundesbank this tool is not going to be used in the near future.

Solid US data

The number of new unemployed fell more than expected. The figures stood at 287k, lower from 295k (after revision from 293k) in the previous week. The 297k was expected according to Bloomberg survey. The data followed solid ADP report, what showed 213k increase of employment in private sector. It was better than 210k projected.

Tomorrow the Labor Department will release monthly data on employment situation. The 215k increase in non farm sector and 205k in private sector employment is expected. If data meets expectations, it will support the case for interest rates hikes in the US. The Federal Reserve is awaited to increase rates before June 2015. Nevertheless, we should prepare for some correction in the dollar market due to significant moves in recent weeks what may push investors to close positions to take profits as drivers for movements are fading.

The zloty despite heightened risk

The volatility increased after the ECB decision and press conference. The stock markets went lower and the EUR/USD couldn't find direction. The risk aversion was strengthened after development of events in Hong Kong and disturbing news form Ukraine. But these are rather triggers of shore term profit taking rather than trend changers.

Increased volatility resulted in significant movement in the zloty market, that were briefly reversed. Nevertheless, the probability of correction in the market is increasing.

2 Oct 2014 17:22|Artur Wiszniewski

This commentary is not a recommendation within the meaning of Regulation of the Minister of Finance of 19 October 2005. It has been prepared for information purposes only and should not serve as a basis for making any investment decisions. Neither the author nor the publisher can be held liable for investment decisions made on the basis of information contained in this commentary. Copying or duplicating this report without acknowledgement of the source is prohibited.

See also:

2 Oct 2014 12:08

Daily analysis 02.10.2014

1 Oct 2014 17:24

Afternoon analysis 01.10.2014

1 Oct 2014 12:52

Daily analysis 01.10.2014

30 Sept 2014 17:23

Afternoon analysis 30.09.2014

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