December 3 2016

Dec. 3, 2016 (Commerzbank AG) – ECB Council meeting: Dr Draghi to extend the therapy

At next week’s meeting, the ECB Council will likely decide to extend the bond purchasing programme (QE), probably by six months. This would make it necessary to lift the issuer limit (33%), but this is difficult for legal reasons. We outline a possible solution.

Outlook for the week of 28 November to 2 December 2016

  • Economic data: It is likely that German industry got off to a good start in Q4 and we look for solid October figures for orders and production.
  • Bond market: We expect 10y Bund yields to remain within their recent trading range, despite the Italian referendum and upcoming ECB decision.
  • FX market:If the Italian electorate says ‘No’ in Sunday’s referendum, there will be downside risks for the euro, especially given the danger of renewed political instability.
  • Equity market: Thanks to the powerful tailwind from monetary indicators we expect the DAX to rise to 11,700 by the end of 2017.
  • Commodity market:Oil prices should settle above $50 a barrel in the wake of the OPEC agreement to cut output.


USA 

Dec. 2, 2016 (Tempus Inc.) – A decent NFP report showing the U.S. economy adding 178k new jobs in November and the unemployment rate falling to a nine-year low of 4.6% failed to lend support to the USD, as markets focus on the outcome of the Italian referendum.

The Federal Reserve is widely expected to raise interest rates later this month, but attention will then shift into 2017. Questions about the economy’s overall strength and inflation pressures created by some of Donald Trump’s proposals are likely to dominate interest rate speculation going into the New Year.

This morning’s economic docket was unable to change the greenback’s fortune. Weekly jobless claims came in higher than expected and touched the highest level since June. Claims increased by 17K to 268K. However, the four week average was mostly unchanged. Jobless claims this year have averaged near the lowest levels in four decades.

EUR

The Euro recovered slightly overnight playing its role as safe-haven to tumbling equity markets across the ancient continent. Investors are concerned that Italy’s referendum will not pass; risking the loss of a key pro-EU leader in Italian PM Matteo Renzi whose political existence is dependent on the “Yes” succeeding.

As discussed in the last few days, Brexit rhetoric from both sides of the equation has been less than friendly as both sides continue to accuse the one another of lack of cooperation. Britain’s incessant interest to remain a player in the single free market while reducing people’s mobility has struck the wrong chord with many EU lawmakers. The shared currency is likely to remain fragile and volatile in the days ahead.

GBP

The British pound was the biggest winner overnight, gaining a full percent against the U.S. dollar. The sterling traded to its strongest level since November 11th after Brexit Secretary David Davis said the U.K. would consider making contributions to the EU in order to secure the best possible access to the single market. Most EU officials have taken a hard line regarding access to the single market but recent commentary may show a thawing. Dutch Finance Minister Jeroen Dijsselbloem was quoted as saying that Britain might be able to participate in the internal market, albeit at a cost.