Europe
Friday saw a fairly quiet finish to what had been a pretty good week for equity markets with some European markets posting their best weekly gains this year and the FTSEMIB set to post its best weekly performance since 2011.
The German DAX, which had struggled for most of this year in negative territory is now back in positive territory year-to-date, after moving back above 11,000 earlier this week.
While equity markets, particularly financials have greeted the measures from the ECB with enthusiasm it is not immediately clear whether the gains seen this week are a reflection of more confidence about the economic outlook, or merely a reflection that the ECB remains concerned about the fragility of the European economy, by its decision to extend QE to the end of 2017.
What the ECB has done is finally deal with the issue of a flat yield curve by pushing short term yields down and drive long term yields up, though the rise in long term yields could well also be a reflection of Friday morning’s sharp rise in Chinese inflation numbers.
In the last 12 months Chinese producer prices have seen a swing of 9.2%, a trough of -5.9% to where we are now at 3.3%, which if replicated into 2017 in the headline CPI numbers might suggest that central banks may be behind the curve with inflation expectations.
The rise in yields also reflects a wider concern for the more indebted European countries and their borrowing costs, though that’s likely to be a discussion for next year, and not now.
We saw some profit taking in financials on Friday ahead of the weekend as the ongoing political uncertainty continues in Italy. The decision by the European Central Bank to reject Italy’s demand for more time to secure private funding for a bailout of Monte dei Paschi (MI:BMPS) is likely to keep markets apprehensive at the prospect of how any new Italian government might look in the context of dealing with the country’s banking sector, bringing closer the prospect of a possible politically toxic bail-in of retail bondholders.
FX
The pound had a good day on Friday after the latest UK trade numbers came in better than expected for October. A rise in inflation expectations to 2.8% from 2.2% has also helped underpin the pound ahead of next week’s Bank of England rate decision.
The euro on the other hand has remained under pressure as a result of some disappointing French manufacturing data Friday morning, and the reported rejection by the ECB of an Italian request for more time for the private sector bailout of Monte dei Paschi.
These disappointing French numbers are likely to have prompted Friday’s announcement from the French National Bank in cutting its growth forecasts not only for this year, but the next two years as well.
Commodities
Oil prices appear to be stabilising as OPEC and non-OPEC members get ready to agree on how non-OPEC members will cut the required 300k barrels a day of output that was agreed at the end of November.
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