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Even More Pointless

Summary

Super Mario Draghi’s announcement last Thursday of a further cut in the deposit rate to negative 0.30% had the undesired effect of a surge in the value of the Euro after an initial fall and a rise in long-dated Government Bond Yields

Even More Pointless
Super Mario Draghi’s announcement last Thursday of a further cut in the deposit rate to negative 0.30% had the undesired effect of a surge in the value of the Euro after an initial fall and a rise in long-dated Government Bond Yields – admittedly to only 0.33% for 10 year German government bonds before they settled at the unattractive yield of 0.30%
But thankfully on the day that spookily bore his name (MAR 10), Draghi did acknowledge that the ECB would not be delving further into negative rate territory – what’s the point?
Supply and Demand
Much of the rest of the ECB’s announcement concerned efforts to get Eurozone banks lending recognizing that negative rates don’t help bank profits but decent margins on loans do. Of course, this supposes that there is sufficient loan demand out there which to date has been weak. Increasing cheap funding for banks helps but…
By upping their monthly asset purchases by Euro 20 billion to 80 billion and including investment grade corporate bonds, the ECB will continue to dominate the government, asset-backed securities (ABS), covered bonds and now investment grade corporate bond markets. While this may provide a positive tail wind for those sectors, liquidity will be poorer still and doesn’t make them good long term investments.  Why anyone would want to buy bonds with a negative yield in any market is beyond us.  Sayings and stories like the ‘greater fool’ and the ‘Emperor’s New Clothes’ spring to mind.
Short Covering Rally – an incoming tide that floated all boats.
February and early March saw rallies from oversold positions when pessimism was at its worst. Those that did best were where short positions were most pronounced, miners’ stocks, oil and other previously unloved assets. High yield debt saw significant investor inflows. Even Brazil’s currency and stock markets have enjoyed a major bounce on hopes that President Dilma Rousseff is impeached – an interesting curtain-raiser in the year of the Rio Olympics!  Unfortunately it would appear US retail investors raised cash at the wrong time and probably missed the bounce.
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BB – Budget and Brexit
On everyone’s lips for this week and June 23rd respectively and interlinked as we’ve already heard that the Chancellor’s intended moves on pensions have been shelved, for this budget, so as not to interfere with a ‘stay’ vote in the referendum.  Incidentally and as we have pointed out before, if you want to follow the chances of a Brexit, it’s probably best to ignore the polls and look at the bookmakers’ odds.  Be careful at work though as you get an ‘inappropriate website’ message appear on your screen and a call from your IT department who might think you were checking the odds at the Cheltenham Festival!
For what it’s worth, Paddy Power has Brexit as 9/4 against and 1/3 on the UK staying in, quite clearly favouring staying in.
For those interested in the antics of Donald Trump in the US election due in November this year and his likely nomination as the Republican candidate, Paddy Power have Hilary Clinton at 1/2 and Trump at 3/1, also clear cut for Clinton.
Other bookmakers are available but they were all better predictors than the polls in the run up to the last UK General Election.
 

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