+27% Dax Shrugs ECB
City Index December 6, 2012 9:40 PM
<p>Euro sells off on a combination of downward revisions in growth and inflation as well as Draghi’s indication that discussions over interest rates remained ongoing. […]</p>
Euro sells off on a combination of downward revisions in growth and inflation as well as Draghi’s indication that discussions over interest rates remained ongoing. The possibility for the refinancing rate to reach 0.25% without the OMT having been deployed would be deemed excessive accommodation from the ECB in the face of a reticent Spain.
ECB downgrades 2012 GDP to -0.6% to -0.4% (from previous -0.6% to -0.2%) and 2013 GDP to -0.9% to 0.3%. Inflation in 2013 shall remain contained at 1.1% to 2.1%
OMT’s Durable Impact
The OMT program announcement was aimed at enabling Spain to request a bailout, but it could well end up eliminating such an event thanks to the stabilising environment created by the September announcement. The positive impact of the OMT announcement on risk metrics has been impressive to say the least:
1. Peripheral sovereign bond yields have fallen 25-30% from their August highs.
2. The Nov rebound in peripheral bond yields prompted by the post-Obama global market selloff proved relatively short-lived compared to the decline in global equities -8% in equities, -15% in 10-yr yields, -11% in oil and -6% in gold.
3. Even the euro’s November selloff paled in comparison to equities, with a 3% decline from its Oct highs in contrast to a 6% fall in the S&P500.
As the next episode of risk aversion re-emerges, Eurozone markets (periphery bonds & currency) are no longer necessarily fair game thanks to Draghi’s backstop. Even if the OMT is contingent upon another country’s decision to request aid, there is always the LTRO option, which could be adjusted via duration (rumours the next one could be five years) according to the required intensity. At a time when even Troika recognized the adverse global macro picture to be a factor in Greece’s difficulty to meet its debt targets, there are always additional tools for the ECB to use in order to contain contagion (OMT, LTRO & rate cut).
German Dax +27% YTD, New year highs & Golden Cross
Germany defies gravity as the Dax outperforms G7 peers with a 27% rise YTD (US S&P+10%, UK +6%, Japan +13%, HK +21%, France +14%, Spain -8%, Italy +8%). Dax performance is matched by only India’s Sensex, which is also +27% YTD.
The index has not only broken a trend line resistance extending from 2007, but also undergoes a Golden Cross, whereby the 55-week moving average crosses above the 100-week moving average for the second time in four years.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.