Market Talk – December 3, 2015

Continued speculation that additional official support would be available next week in China supported the Shanghai Stock Index yet again. The strong close (of over +1.3% higher) in Asia has been short-lived as the events in Europe have reversed most, if not all, of today’s move (as seen this evening in futures trading).

Initially, all core European markets started in a positive move as we edged towards the main event of the week – the ECB announcement. Despite the FT’s attempt to lead the market, the official announcement was less than what most market players had assumed or expected. The deposit rate was cut but only by an additional 10BP (to -0.30%) and not the 20BP the market had expected and at the same time extended the quantitative easing program until March 2017. Although an increase in the type of bonds the ECB will take, the actual size was not increased and that spooked the Bond markets.

US stocks has not liked what it heard from Europe and the great unwinding of the carry trade began. The carry-trade (short EUR long USD) is being unwound and that in-turn sees US stock weakness propelling the DOW over 300 points down but closed only 250 lower.

The EUR was definitely the talk of the day with the largest range we have seen in a day for a very long time. After an initial weak morning session Mr Draghi certainly changed all that. Upon the announcement the EUR climbed from 105.23 up over 4 big figures to 109.50 (an increase of over 3% on the day. It was certainly a day of sell the rumor buy the fact and one hears many players liquidating positions ahead of tomorrows non-farms release not to mention next week comes the Fed meeting.

Most currencies improved against the USD with GBP, JPY and CHF (Swiss) all gained around 1% on the day. Unsurprisingly the DXY (US Dollar Index) lost over 2pts to close around 98 (-2% on the day).

The worst was seen in the Bond markets as many had bought core and non-core European paper in the hope they could squeeze the ECB. Their play against Draghi had to be unwound and the race to liquidate began. The spread US/Germany 10yr bonds tightened as Europe suffered most. US 10’s closed at 2.32% while the German 10yr closed 0.69% a spread of 163bp; which is 8bp tighter on the day. 30yr US bond lost 15bp today placing the yield over the 3% mark again at 3.06%.