Stocks are on the front foot this morning after US and European equity markets bounced back yesterday. The S&P 500 is now flat for the week, whilst the Nasdaq, Russell 2000 and the bulk of European markets remain in the red. The Dow rallied more than 300pts to within about 60pts of Friday’s record close, whilst the Vix closed under 18. The FTSE 100, which is trading up 0.2 per cent in the early session today to hit 6,900, has lost about 1 per cent this week so far after touching a fresh post-pandemic high above 7,000. Crude oil declined again as India’s coronavirus cases surged and stocks built in the US. Attention turns to today’s ECB meeting, which comes after Germany’s constitutional court finally gave the green light to the EU recovery fund and Italian prime minister Mario Draghi set out a €220bn recovery package to boost Italy’s economy. After years of calling for structural reform of European economies from his seat on the ECB, he now finally has the chance to pull some fiscal levers to deliver as PM.
Remember Credit Suisse and Archegos? The Swiss bank at the centre of the storm has today reported a net loss of SFr252m in the first quarter, reflecting a Sfr4.4bn charge taken because of what it coyly describes as “the US-based hedge fund matter”. There is another CHF 0.6bn exposure but the bank has now exited 97 per cent of positions. The bank also announced it will raise capital to repair the balance sheet, issuing Sfr1.7bn in convertible notes to return the CET1 ratio to 13 per cent.
This might help assuage regulators a little. Separately, Swiss financial regulator Finma said today it has opened enforcement proceedings against Credit Suisse in relation to the Archegos affair and ‘possible shortcomings in risk management’, having already commenced an investigation into CS’s dealings with the failed Greensill Capital. CEO Thomas Gottstein said there is no problem with the bank’s risk culture. Har har.
Rather like putting a decent round of golf together, it only takes one out-of-bounds and a three-putt to ruin the card. CS was actually doing quite well before it all blew up. The underlying business results were rather good, with adjusted net revenues excluding significant items and the Archegos bill rising 35 per cent year-on-year to Sfr7.4 bn, and income ex-nasties up 280% to Sfr3.6bn. Shares were down 4-5 per cent in early trade taking it to the bottom of the Stoxx 600. Credit Suisse has found itself out of bounds several times lately – time to go back for some pro lessons.
Crude prices fell as rising cases in India threatened to dampen this summer’s demand-led recovery, whilst US stockpiles unexpectedly rose. The surge in global cases to new records is hurting sentiment towards crude oil as there are growing concerns about the pace of recovery in demand this year. Yesterday the US Energy Information Administration (EIA) reported a build of almost 600k barrels, vs expectations for a roughly 3m barrel drop. Distillate inventories fell more than expected, whilst there was a mild rise in gasoline stocks that was less than anticipated. Gulf Coast refiners expanded capacity to the highest since March last year, although overall refinery utilization rates were steady at 85 per cent.
Spot WTI breached the 50-day SMA and is trading with a bearish bias after losing over $1.30 on Wednesday.
Gold continues its run to the upside with little pressure coming from US yields. US initial claims data today is the one to watch. Looking to test the 100-day line at $1,803, which could then call for a return to the $1,837/57 area defined by the 38.2 per cent retracement and 200-day SMA.
ECB meeting ahead: keeping it simple
As per yesterday afternoon’s note, today’s ECB meeting ought to be a quiet one. After last month’s word puke from Lagarde (“Financing conditions are defined by a holistic and multifaceted set of indicators, spanning the entire transmission chain of monetary policy from risk-free interest rates and sovereign yields to corporate bond yields and bank credit conditions...”, whatever that means?), we have spent several weeks trying to accurately assess where the ECB is really at in terms of responding to the changing economic outlook with regards the recovery from the pandemic, rising bond yields and higher inflation expectations. There is greater clarity now – it looks like the ECB is happy to let inflation run higher and only let bond yields move up if due to better growth: it’s now all about real yields. At the last meeting the ECB said it would pick up the pace of asset purchases, front-loading the PEPP scheme, but it could still use less than the full envelope of €1.85tn if favourable financial conditions can be maintained without spending it all. The outcome of the March meeting was very much that the PEPP programme is more likely to end by March 2022 than be extended, albeit policy will remain very accommodative well beyond that point. The question about tapering PEPP should wait until June, and ending the programme may need to be discussed in September, but for now the ECB should be looking to keep it simple.
This ought to be a quiet one for the ECB, but the propensity for miscommunication is strong. Since the March 11th meeting, the selloff in sovereign debt and rally in yields cooled, before picking up some steam again. While German 10-year bunds are north of where they were at the time of the March meeting and close to the February highs, real rates remain at historic lows. This is what matters to the ECB more than nominal rates. Moreover, the economic data has not materially changed since the last meeting and there signs the largest economies are adapting to lockdown restrictions better than before and are more resilient. The latest Zew survey about the German economy shows investor sentiment at its highest in over a year. The head of the French central bank recently noted that economic activity is declining less than feared in April. Vaccinations, slow to start, are picking up pace and the EU should be on course to catch up the UK and US before too long.
So, we look rather to the risk that a hawkishness creeps in. The ECB will need to be careful about getting itself tied in knots about when and how it will exit PEPP just yet, and whether a PEPP taper coincides with raising traditional asset purchases, and just what the reaction function is given it’s spent several weeks trying to clarify this since the last meeting. Now is not the time for such debates, however markets will look towards hawks becoming louder as inflation starts to pick up. Hawks are going to get more vocal if inflation starts runs higher over the next few months – the mandate is clear on this one. Lagarde will need to not sound overly confident about the recovery (why should she anyway?), or else risk letting markets latch on a timeframe for winding down PEPP.
And we should note that chatter about when is the right time to exit emergency mode is coming just as the ECB is looking at a potential change to the inflation mandate. Not content with a more symmetric target a la the Fed, it also wants to introduce inequality and climate change mandates…This only makes guessing the future path of monetary policy and the ECB’s reaction function even more muddy, which in turn may lead to some form of spike in yields and widening of spreads, which exactly what the ECB is seeking to avoid. Another reason to keep it simple tomorrow.
Are tighter financial conditions ahead? The ECB will also have to wrestle with the expectation of tightening financial conditions in the Euro area later this year. Banks and Eurozone banks expect to tighten access to credit in the second quarter, having already tightened in the first quarter. “This reflects banks’ uncertainty regarding the severity of the economic impact of the third wave of the pandemic and the progress in the vaccination campaign,” the ECB said, adding that loan demand is also faltering as companies postpone investments. The ECB’s job is to make sure it doesn’t get dragged into a conversation about tapering PEPP and keep the markets happy until June when it will have much more data at its disposal and news on vaccinations will hopefully be much better. For this meeting, keep it simple is the order of the day.
EURUSD remains bound by the 100-day SMA to the upside at 1.2050- a sustained breach here calls for look at 1.22450. Failure again might see retest of the 23.6 per cent retracement at 1.1950.
Neil Wilson is chief markets analyst at Markets.com
