October 25, 2018 / 7:33 AM / a month ago

Daily Briefing: ECB - Sticking to its guns

LONDON (Reuters) - Despite trade concerns, evidence of a weakening euro zone outlook and looming risks like a no-deal Brexit and an Italian debt crisis, the European Central Bank looks determined for now to stick to its guns on winding down stimulus.

General view as European Central Bank (ECB) President Mario Draghi holds the news conference following the governing council's interest rate decision at the ECB headquarters in Frankfurt, Germany, September 13, 2018. REUTERS/Kai Pfaffenbach

There seems little doubt that it will keep its policy on hold at today's rate-setting meeting - the main questions are about how explicitly it chooses to acknowledge that the growth outlook is deteriorating.

It could, for example, downgrade the risks to the outlook from broadly balanced to tilted to the downside.

The danger in that, however, would be that investors might take a change of risk assessment as a sign of an imminent policy move.

The ECB announces its policy decision at 1145 GMT, followed by Mario Draghi’s news conference at 1230 GMT.

NATO allies are due to meet today to hear Washington explain the thinking behind President Donald Trump’s move to quit the 1987 Intermediate-range Nuclear Forces Treaty, which rid Europe of land-based nuclear missiles.

It will be interesting to see whether the United States's European allies overtly tell Washington they will not host U.S. missiles on their soil - something Vladimir Putin has warned would lead to them becoming targets for Russian missiles.

Once more the plotters against British PM Theresa May's leadership of the Conservative Party failed to come out into the open at a meeting with her last night, the conclusion of which was an albeit stage-managed show of loyalty.

No one is under any illusions that the party is happy with her leadership, but the simple fact is that it has no one out there seen more competent.

The same is true with the country, it seems: An Ipsos MORI poll on Wednesday showed a record 78 percent of voters lacked confidence in May to get a good deal from Brussels, “and nor is there much evidence that they would have much more confidence in anyone else” notes the pollster’s head of political research.

MARKETS AT 0655 GMT

As the global stock markets slide snowballs into one of the worst months of the past 10 years, attention will now start to shift back to see whether policymakers can offset the mounting investor gloom that threatens to feed back into the real economy, business spending and consumption.

The ECB meeting provides one opportunity to signal any rethink of gradual monetary policy tightening worldwide, with soured euro business confidence readings at their lowest in four years this month as Sino-U.S. trade war fears bite German exporters in particular.

While the ECB is unlikely to alter its late 2019 timeline for possible interest rate rises, it may sound concerns about the deterioration in financial market and business sentiment that could prompt speculation about the pace how it winds down its bond-buying stimulus programme.

The lack of policy ammunition to guard against another economic downturn, however, is a factor that unnerves investors in equal measure.

While fellow G7 member the Bank of Canada ploughed ahead with a rate rise on Wednesday - and signalling more to come - the acceleration of the equity market selloff on Wall St and worldwide overnight will start to register more loudly.

S&P500 losses of more than 3 percent now make October so far the worst year for the index in 9 years.

Concerns about deteriorating forward guidance from U.S. companies hit by President Trump’s trade wars has added to monetary tightening fears and spreading bear market signals around the globe. Heavy losses for the technology sector after warnings from chipmakers such as Texas Instruments and STMicro saw the Nasdaq lose more than 4 percent and enter formal correction territory of more than 10 percent losses from this year’s peaks.

The VIX volatility gauge spiked to more than 25 percent.

Microsoft regained some of its 5 percent losses after the bell, however, after decent Q3 results.

The broad market selling continued through Asia markets, with Tokyo’s Nikkei losing almost 4 percent and HK and Seoul down more than 1 percent.

MSCI’s all-country index has now lost more than 9 percent so far in October to its lowest levels in over a year and is on course for its worst month since the height of euro crisis in 2012. MSCI’s emerging markets equity benchmark, now down almost 27 percent from the peaks of January, fell to its lowest level since March of 2017.

Against a backdrop of the dire October business sentiment readings and a drop in the euro zone economic surprise index to its most negative since May, European stock futures were down more than half a  percent too. 

The dollar and U.S. Treasury bonds were all higher amid the equity market trepidation.

Euro/dollar dipped below $1.14 overnight for the first time since mid-August before rebounding slightly this morning

Ten-year U.S. Treasury yields hovered about 3.10 percent.

Emerging market currencies were weaker across the board.

Sterling steady after Wednesday’s losses after UK PM May appeared to get a positive reception after meeting with Conservative party lawmakers and following reports she may face a leadership challenge.

Brent crude oil prices steadied about $75.

Turkey’s lira slipped slightly ahead of Turkey’s central bank policy decision later.

A slew of European earnings to keep traders busy with UBS, AB InBev, and Norwegian Air among those reporting.

Results were looking slightly better for banks, with both Switzerland’s biggest bank UBS and Britain’s biggest mortgage lender Lloyds beating profit expectations.

Stronger than expected results from Swiss engineering firm ABB could also encourage investors after weak earnings from Caterpillar drove a sharp selloff and anxiety around industrials.

On the other hand, with tech particularly in the spotlight after the Nasdaq had its worst fall since Aug 2011, BE Semiconductor’s results will do nothing to lessen concerns.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., October 24, 2018. REUTERS/Brendan McDermid

The Amsterdam-listed maker of semiconductor assembly equipment said it saw a nearly 25 percent drop in Q4 revenue due to weaker market conditions.

AB InBev could also sink after cutting its dividend and reporting in-line Q3 earnings.

 A look at the day ahead from European Economics and Politics Editor Mark John and EMEA markets editor Mike Dolan. The views expressed are their own.

Editing by Toby Chopra

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