The euro has remained bid

October 5, 2016

European Outlook: Asian stock markets are mixed, with Japanese bourses remaining underpinned by a weaker Yen, which is lifting exporters. Hong Kong stocks also extended their rally, in tandem with mainland Chinese markets, amid hopes that China’s economy is stabilising. Elsewhere, however, markets are slightly in the red, and U.S. and U.K. stock futures are also down, despite a pick up in oil prices that saw the front end WTI future rising above USD 49 per barrel. Reports that the ECB council is favouring a tapering of QE purchases, if and when stimulus measures come to an end has spooked markets late yesterday and saw Bund futures dropping sharply, while the EUR picked up and gold fell over 3.3% The reports also said QE could still be extended at current levels beyond the current timeframe, but the reaction highlights how reliant markets still are on central bank support and with the EUR rising above 1.12 against the USD again, Eurozone bond and stock markets are likely to feel the pressure at the open. The ongoing weakness of the pound meanwhile will continue to put a floor under the FTSE 100. The calendar today has the final reading of the Eurozone manufacturing PMI, expected to be confirmed at 52.1 while the U.K. services PMI is seen falling to 52.0 from 52.9 in August.

ECB said to be nearing a consensus that QE should be tapered gradually before the program ends, according to sources familiar with policymaker deliberations today at the interim Governing Council meeting (cited by newswires). One suggestion was to trim purchases by EUR10 bln per month. When such reductions will begin will depend on the economic outlook. And it was also noted that QE, at the current EUR80 bln pace per month, could be extended beyond the March 2017. The ECB also extended its economic projection horizon by 1 year. Meanwhile, in an emailed statement from the ECB, it was noted the Governing Council “has not discussed these topics.”

FX Update: The euro has remained bid following reports that the ECB is considering tapering its QE program. EURUSD lifted back toward the high seen yesterday after the London close, at 1.1218, while EURJPY rallied to fresh three-week high territory above 115.00. USDJPY also managed to clock a new three-week high, at 102.99, with the dollar itself is being underpinned after Fed’s Lacker said a rate hike is needed to head off a likely increase in inflation. (see more below) The yen itself has remained the short of choice in forex markets with the BoJ still seen on course to expand monetary policy, and with stock markets holding up, although mixed in Asia today. Focus is shifting to Friday’s U.S. jobs report for September, as this will have potential to make or break prospects for Fed tightening by as soon as year-end.

Fedspeak: Lacker: said he would have dissented in September because interest rates “need to rise,” a comment that has sparked some ire on Twitter, though note he’s a non-voter and, thus, was denied the opportunity. He agrees that gradual hikes are the prescription, but warns that the median view of 2 hikes in 2017 is “awfully gradual.” Meanwhile, the IMF’s chief economist says there’s no great danger of the U.S. economy overheating. Yields jumped on earlier hawkish headlines from Lacker, on the heels of those of long time hawk Loretta Mester, yesterday.

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