June 14, 2018 / 7:37 AM / 8 months ago

Daily Briefing: QE - end in sight

LONDON (Reuters) - Today is likely to mark a milestone in Europe's efforts to put the 2008/09 financial crisis behind it as the ECB discusses whether to halt by year-end the asset purchases credited with pulling the euro zone out of post-crisis recession.

FILE PHOTO: European Central Bank President Mario Draghi holds a news conference at the ECB headquarters in Frankfurt, Germany, April 26, 2018

Policy-makers meeting in the Latvian capital of Riga may formalise the end of QE today or keep that decision for the next meeting in July, but either way they have long signalled their belief that stimulus be wound down and policy shift towards a consideration of interest rate hikes. The question is how the growing signs of an economic slowdown influence their deliberations.

In a separate step away from the debt crisis era, Greece is nearing the end of its bailout programme this summer and will present reforms agreed with lenders to its parliament today. Athens wants to pass a final review by its creditors ahead of a eurozone finance ministers' meeting on June 21, where it also wants progress on a deal on further debt relief.

The reform bill includes measures to expedite privatisations in the energy sector, cuts to state spending on pensions and labour market reforms. There will be protests outside parliament.

British PM Theresa May has kept her Brexit strategy just about intact so far this week but remains hemmed in on all sides - by Brussels, by her own parliament and especially by her party. Today she is expected to put forward the compromise amendment to the EU Withdrawal Bill she promised pro-EU party rebels, who want parliament to have more say in the process.

This is the moment when we have to tell each other the truth. There are choices that we face, there are trade-offs that we have to accept

Already those rebels have warned her not to renege on the promise given to them on Tuesday, amid some media reports they won’t get what they are asking for - provisions that would make it harder for Britain to crash out of the EU without a trade deal.

Separately, May has an awkward meeting with top bankers, who will ask her bluntly why they should stay in Britain if the sector will be disadvantaged as a result of Brexit.


World markets are in the middle of a double-whammy from the world’s two most influential central banks, with the Federal Reserve tilting slightly more hawkish than most had bargained for late Wednesday and the European Central Bank likely to lean toward ending its super-easy monetary policy by the end of the year when it meets later today.

Combined with surprisingly weak Chinese industrial and retail readings for May and the imminent release of detailed U.S. tariffs on some $50 billion of Chinese imports, there's been an understandable shiver through the major stock markets.

Japan’s Nikkei and HK’s Hang Seng ended down more than 1 percent, with South Korea’s Kospi falling almost 2 percent. But perhaps the real surprise is, yet again, why there hasn’t been a bigger reaction.  

The S&P500 closed down about 0.4 percent after the Fed’s expected decision to raise interest rates for the second time this year, by another quarter percentage point, to the 1.75 to 2.00 percent range. Its consensus forecast for the remainder of the year, however, shifted toward two more rate rises – whereas the market has previously been priced for little more than one.

The nuance was that this aggregate forecast resulted from just one committee member nudging a “dot plot” rate horizon higher and expectations for three more hikes in 2019 remained unchanged. That softened the initial market reaction somewhat as futures markets have moved from pricing in roughly a 20 percent chance of a fourth rate rise this year to about 50/50.  

As a result, 10-year Treasury yields’ pop over 3 percent was short-lived and they have slipped back to about 2.96 percent since, with the 2-10 year curve falling to another decade low below 40 basis points. With the ECB in its sights, currency markets gave the dollar only a temporary lift and euro/dollar is now higher than it was before the Fed decision as markets eagerly await Mario Draghi’s press conference in Riga later.

ECB officials surprised investors last week by flagging a possible decision at today’s meeting on a firm timetable for ending the central bank’s asset purchase programme by the end of this year.

There will also be intense focus on how the ECB refers to the new Italian government and its spending plans and also on the alarming judder in the German economy over recent months as world trade tensions have ratcheted higher. European stock market futures are down about half a percentage point ahead of the open and Wall St futures are down a fraction.

A motorist views anti-Brexit protestors outside of the Houses of Parliament in London, June 13, 2018

German bund yields nudged higher. The dollar was down more broadly against the major currencies first thing, although fresh pressure on emerging markets this week continues as the combined hawkishness from both Washington and Frankfurt alongside global trade tensions weigh on the likes of Turkey’s lira ahead of next week’s election there and Latin America currencies as Argentina works through its IMF support plan and struggles intervening to buoy the peso.

South Africa’s rand has perked up a bit today against the ebbing dollar, however. Also significant for emerging markets has been the fact that, mindful of disappointing economic numbers, China’s central bank did not immediately follow the Fed hike as is typical. Whether that’s a positive sign or one that presages greater volatility in the yuan remains to be seen.

— 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. —

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