By Sreekala Kochugovindan, Anando Maitra (Barclays) | History highlights the importance of the business cycle in determining the effect of rising rates on asset returns, a topic we discussed in depth in Scenarios for a shifting bond landscape. We examined US data since 1925 and selected episodes where US Treasuries sold off by more than 5% in one year. The results were pretty mixed, with equity returns ranging between plus and minus 50% and providing no consistent pattern.
MADRID | The Corner | US corporate results from the third quarter might be around +4%/5% (earnings per share), but it is highly probable that European results will be weak. Also, there should not be great expectations on central banks to save the situation this time, except, possibly, a more “dovish” refocusing by the American Fed (the US central bank delayed an interest rate increase or even tapering, which would give support to markets).
MADRID | By Julia Pastor | As expected, ECB’s September TLTRO will not make big headlines. 255 European banks borrowed €82.6bn of liquidity below consensus estimate of €100-150bn. Although the Frankfurt-based institution doesn’t provide a geographical breakdown, banks in Italy and Spain were among the leading borrowers (40% of the total) to trim funding costs. Spanish entities are thought to have asked half of those €30bn at their disposal, although some entities “are not willing to disclose how much they asked for,” an ECB source confirmed to The Corner.
MADRID | The Corner | While bonds are considering a world without growth nor inflation, equities seem much more optimistic. On their Monday comment, JPMorgan analysts point out that, on a global level, monetary policies are still increasingly more expansionary in aggregate form.
MADRID | The Corner | UK Consumer Prices Index (CPI) grew by 1.9% in the year to June 2014, up from 1.5% in May, according to official data released on Tuesday, almost reaching the Bank of England’s 2% target and strenghtening the case for a rise in interest rates which have been held at a record low of 0.5%.
WASHINGTON | By Pablo Pardo | The Monty Python are back in London, and one of their most famous sketches revolves around the phrase “nobody expects the Spanish Inquisition.” The Bank of International Settlements (BIS) is like the Spanish Inquisition, only less funny and more predictable than the British surreal comedy group: it is the bearer of orthodoxy, even if it means sending everybody to the stake. Its prescriptions are suicidal in economic terms, wrong from a moral point of view, and unjust from a societal perspective.
ZURICH | By UBS analysts | On 5 June, the ECB delivered a comprehensive monetary policy package, comprising cuts in the refi rate (from 0.25% to 0.15%), the deposit rate (from zero to -0.1%) and the marginal lending facility (from 0.75% to 0.4%). The ECB also rolled out the ‘full allotment mode’ – the commitment to supply unlimited liquidity (against adequate collateral) at the refi rate – from July 2015 to December 2016, and it will inject liquidity by ending the sterilisation of the Securities Markets Programme (SMP) portfolio.
MADRID | By Francisco López | The first world power is doing worse than expected. USA’s GDP decreased in 1Q by 2.9% year on year, nearly three times the 1% foreseen just a month ago and far from 1.8% that Wall Street expected. European stock markets, unlike the American, reacted immediately with heavy losses. Spanish Ibex 35 leaded the way losing 1.25 and finished below 11,000 points.
MADRID | The Corner | After being accused to send mixed signals to the markets (one British MP even compared him to an unreliable boyfriend), Bank of England’s governor Mark Carney backed off and played down the chances of raising interest rates. After all, Bundesbank’s Jens Weidmann may be right: cheap money can be as addictive as a drug.
NEW YORK | By Dickson Buchanan Jr. via Truman Factor | The European Central Bank’s (ECB) decision to charge a negative interest on overnight deposits is not going to lead to a higher targeted inflation rate, despite ECB President Mario Draghi’s insistence that it will. Like all cases of central planning, this decision will have unintended and costly consequences – some of which are already starting to play out.