Global weekly: No more wait and see

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ECB President Mario Draghi surprised markets this week with his readiness to expand the central bank’s stimulus programme, including a further cut in rates. The news buoyed equity markets.

The European Central Bank (ECB) looks set to increase its stimulus programme in December. ABN AMRO Group Economics expects the size of the monthly asset purchases to increase and for the term of the programme to be extended past the current termination point of September 2016. ECB President Mario Draghi is signaling this support in the face of a fragile economic recovery in the eurozone, that has been put under pressure by the slowdown in emerging markets and a rising euro. These factors, along with lower commodity prices, have hurt the inflation outlook. The euro versus the US dollar has been trading above the level of 1.10, which had been the basis for the ECB’s projections in September. Oil prices have also been lower than expected. The ECB says it would now re-examine the degree of stimulus in December. It also noted that it was no longer in wait-and-see mode. All options are being considered, including a further cut in the deposit rate, which is currently is at -0.2%. After Draghi’s remarks, equity markets rebounded.

Bond markets update
US and German ten-year government bonds stayed within their trading ranges this week. A lack of clarity over the timing of the Federal Reserve’s pending hike in interest rates is driving investors to US Treasury ten-year notes. US ten-year government bond yields dipped under 2% this month from a high of 2.3% before the Federal Reserve’s meeting in September, when it decided to hold off from raising rates.

German government bond yields are higher than 22 January 2015, when the ECB announced its asset purchase programme to stimulate the eurozone economy and counter the threat of deflation. Inflation expectations have not risen by very much since the ECB’s purchases began. Bond yields are normally highly correlated with inflation and inflation expectations. As bond yields have not increased by very much since the beginning of the year, bond markets appear to not be expecting inflation to pick up.

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