Afternoon analysis 08.12.2016

The European Central Bank surprised the markets. The QE program will decrease from 80 billion to 60 billion euro per month, starting from April 2017. This decision caused the zloty to give away a portion of its recent gains.

EBC against consensus

The ECB decided that the QE program will remain at the level of 80 billion euro until the end of March 2017 and go down to the level of 60 billion euro between April and December. Interest rates remained unchanged. The ECB emphasized that the QE program may be increased if financial perspectives are unfavorable. Moreover, the QE program will be continued until the path of inflation is consistent with its goals.

Mario Draghi said that the ECB will increase the spectrum of purchased assets in January 2017 and decrease their maturity minimum from two years to one year. However, Draghi emphasized that this is only a suggestion that the ECB will discuss. Purchasing bonds, which are below the current deposit rates (negative 0.40%), will be possible from January. Draghi also assured that these decisions will not harm favorable financial conditions. However, he criticized the pace of structural reform, which is considered by the ECB as one of the main reasons for slower economic growth.

Even though the limit in the QE program may have seemed favorable for the euro, the press conference after the meeting showed that it will be the opposite. After its initial increase to 1.087, the EUR/USD went down to 1.063. The general message appeared to be negative for the euro. This overvalue is partially caused by the fact that the majority of the market was surprised with this decision. Moreover, Draghi emphasized that tapering wasn’t discussed. Nevertheless, we may expect more fluctuations on the euro in the forthcoming days.

Zloty under influence of global sentiment

The zloty wore-off before the ECB announced its decision. The euro went up to the level of 4.46 PLN. However, the EUR/PLN returned to the level of 4.45 due to a decrease in the EUR/USD to the level of approximately 1.065. The zloty wore-off against the dollar, which reached the level of approximately 4.18 after Draghi’s press conference. The pound and the franc became stronger against the zloty as well (5.27 PLN and 4.12 PLN, respectively).

The Polish currency has been determined by the global sentiment today. Its value against the forint was basically unchanged. This situation should not change in the forthcoming days. The behavior of the zloty will most likely be determined by the EUR/USD pair.

Tomorrow’s events

At 8.00 AM, Destatis will publish the data regarding the German trade balance for October. This index was slightly worse than expected in September (21.3 billion vs the expected 23 billion). Export decreased by 0.7% MoM and import decreased by 0.5%. During the entire third quarter, export decreased by 0.4% QoQ, while import increased by 0.2% QoQ. The market expects this index to be at the level of 21.5 billion for October.

Export and import are expected to increase as well (1% MoM and 0.9% MoM, respectively). The market may ignore this data, even though it’s significant for the euro zone’s economic growth in the fourth quarter. This week’s most significant events in the financial market are due to the Italian referendum, as well as the decision from the ECB.

Therefore, the markets will most likely continue to analyze the latter event tomorrow. Moreover, next week’s Federal Reserve meeting should attract investors’ attention quite rapidly (this is because of the decision regarding rate hikes.)/

At 10.30 AM, the Office for National Statistics (ONS) will publish data from the British building sector for October. This index has been showing a depreciation trend in the Year over Year interpretation since the beginning of 2014. It was at a negative level in March (negative 1.2% YoY). However, it was at the level of positive 10.6% YoY in January. Despite its slight growth in August, as well as in September (0.8% and 0.2% YoY, respectively), the market expects a decrease for October in the Year over Year interpretation.

The building production data in the Month over Month interpretation has been relatively volatile. However, this index increased by 0.3% in September. The market expectations regarding October are at the level of 0.2% MoM. This index’s contribution to the British GDP is at a relatively low level (5.9%). However, after yesterday’s negative data regarding industrial production, which was the worst in more than three years (negative 1.3 MoM and negative 1.1% MoM), investors may be especially interested in tomorrow’s publication. This is because the contribution of the industrial production index to the GDP is at the level of 14.6%, which is minor as well. Negative data regarding the building production could confirm potentially lower economic growth for the fourth quarter. Moreover, this could make the stagflation scenario more likely and wear-off the pound.

At 4.00 PM, we will know the consumer sentiment index for December. This index is published biweekly by the University of Michigan. It reached the value of 87.2 in October, which was its lowest for a year. The consumer sentiment index increased by 7.6% MoM (2.7% YoY) in November, and reached the level of 93.8. This was the result of optimism among consumers, which was caused by the unexpected victory of Donald Trump in the American presidential elections.

The announcements of reducing taxes, increasing infrastructural expenses and simplifying the financial system were interpreted by consumers as an improvement of economic perspectives. Moreover, they increased the consumer optimism towards their personal finance. The market expects this index to grow to the level of 94.5 in December. This reading would be near this year’s maximum, which was quoted in May at 94.7. The historical record is at the level of approximately 111. This index has been significant for the dollar. However, its impact should be limited regarding today’s ECB meeting, as well as next week’s Federal Reserve meeting.