Weekend Summary & The Budget Ahead
March 14, 2016
Markets spent Friday digesting Draghi's bombshell from the day before. Stock markets recovered and closed the week higher, whilst FX markets continued to push a risk-on position, coming out of the dollar and back into just about anything that had been over-sold in the days running up to Draghi.
Despite markets now seemingly approving of Draghi's move, it seems that not everyone in the ECB wanted it to happen. Two members voted against the proposal and others in the Governing Council raised concerns that more stimulus would become less effective – they seem to be right there. The German Bundesbank was against the measures altogether, feeling that repeated stimulus will lead to a negative loop of high expectations, followed by disappointment. Ironically, it is German companies that will stand to gain from the moves, as they have plenty of businesses with investment grade bonds that are now eligible to be included in ECB purchases.
The German political landscape has changed over the weekend, as regional elections in three states took place and two of those states fell to the Alternative for Germany (AfD) party. The anti-immigration party took commanding leads in the elections, which is a bitter blow to Angela Merkel's CDU party and her pretty 'open door' immigration policy.
The migrant crisis in Greece is set to cost more than the €600 million of GDP they'd already forecast, as the country has stopped just being a 'transit nation' and is now spending considerably more on longer term solutions. Greece have announced a better than expected primary budget surplus in the last few days, which it hopes will be enough to bring creditors back to the negotiating table and restructure their debt pile to make it more affordable – almost the least they can do given the amount of free money the ECB are throwing around – but creditors insist there is still more to be done before that can happen.
Closer to home; George Osborne has warned that he'll have to make further cuts to public spending in the next budget, amounting to “50p in every £100' so half a percent, or £4bn. The cuts will be deeply unpopular with everybody, particularly as the government seem unwilling to make long term infrastructure investments to offset some of the pain that spending cuts cause. Using fear to justify his agenda, Mr Osborne said the world was “a more difficult and dangerous place… and more uncertain than at any other time since the global financial crisis”. He'll use this platform during Wednesday's budget to increase insurance premium taxes, cut payments to the disabled and probably raise fuel duty.
Ireland are putting together a 'Brexit fund', that will enable them to facilitate a possible influx of fund managers who will have to leave London and set up in Europe to be able to continue selling products and services. Ireland would still be a net loser in terms of trade if the UK were to leave, but are sensibly doing what they can to make the best of a bad situation.
Overnight we've seen some disappointing data from China, but investors seemed unfazed and put in a very respectable trading session. This has led to a strong start in Europe, with most markets already close to 1% higher this morning. Data today is incredibly light, so we probably expect to see more of the same from Friday, with investors enjoying the extra support from the ECB. US clocks have gone forward, bringing the time gap between London and New York to four hours. This typically reduces the lunchtime lull in activity, which is always welcome.
The week does get a lot busier as we press on though, with the budget, UK unemployment, the Fed rate announcement and policy statement, as well as rate decisions from the UK and South Africa to keep us on our toes.
Have a great week