Friday, February 24, 2017

ECB: tapering since April 2017

The meeting of the European Central Bank that took place in December 2016, was key for the world markets. Their conclusions were more or less what was expected:

 - Neither the rates (0%) nor the deposit rate are touched, they are both in dangerous negative territory, with deposits at -0.4%. Consequently, the yield of European short-term bonds, sensitive to these data, came strong at rise, because they feared a drop in rates.

 - The ECB can buy debt at rates below -0.4% referential and 1 year (the previous minimum was 2 years), which can buy debt from countries with negative rates in the short term (the case of Germany). This detail abruptly turned the 10-year German bond yield (the Bund, European benchmark) downward, ending at 0.38%.

Today, the 10-year German bond (Bund) was very volatile as 
the decisions of the ECB were being digested.

- As of April 2017 the monthly purchases of 80,000 to 60,000M euros are reduced, that is, the tapering begins, although later, in the conference, Draghi hinted that the initial amount can be returned if the situation demands it. With these huge purchases (which can become a dangerous vice) the ECB helps to keep the yield of the bonds very low, because it increases their demand and with it their price.

 - These tapering will continue until December 2017 (no longer September). European banks happy with the news: more issuance of money for purchases of their corporate bonds.

 - Then in the usual conference, Draghi commented that he does not see inflationary pressure, nor deflation, foreseeing 1.3% for 2017, even far from the 2% target. This data will impact on the euro that follows its fall, as it sees far the rise in interest rates.

- In terms of growth, it foresees a GDP of 1.7% for this year and 1.7% for the next, higher than the previous estimate of 1.6%, good data for stocks, who favor solid economies.

 - Brexit and the election of Trump believes will see effects only in the medium and long term.

The Eurostoxx50 index, which measures the eurozone, continues with its 2-week rise, today at +1.21%, struggling to finally break the resistance at 3,150, which lasted all of 2016, to close the year up. Wall Street, on the other hand, reacted with moderation (SPX +0.01% now), despite a good data from Jobless Claims that reinforces the labor market. In currencies, the euro reacted weak against its peers, including the dollar, the EUR/USD at -1.22% at the moment. For now, these are the data and immediate consequences.

With the decisions of the ECB that ranging market of the Eurostoxx50 all 2016 can break its resistance.

The Recommended Reading

Over the years I understood that risk management is the sure way to succeed in the daily stock trading. One of the ways to manage the risk is to study the industrial sectors daily and trade according to them. 

The present article of makes a technical analysis of the 10 sectors that form the GICS classification, graphically using the Relative Rotation Graph RRG quadrant, where at a glance you can identify the leading sectors today, those that are falling , weakening and reinforcing. I literally transcribe your suggestions for these days, quite coincident with what was expressed in previous posts of this blog.

- Well defined sector rotation at the moment
- Avoid Utilities, Staples and Health Care as they push deeper into the lagging quadrant
- Watch Technology as it rotates inside the weakening quadrant
- Financials are still leading, but relative trend is getting mature
- Energy and Industrials inside leading quadrant offer potential
- Prefer Materials over Discretionary inside the improving quadrant