Global equity markets rallied strongly last week after Mario Draghi finally gave them what they wanted, an asset purchase plan that will encompass the purchase of sovereign government bonds. The expanded programme amounts to the Eurosystem buying €60 billion a month of public and private sector debt securities, from March 2015 until at least September 2016. As well, more easy money will be made available to the banking system with the six remaining targeted longer-term refinancing operations (TLTROs) to be offered at the main refinancing interest rate when each TLTRO is conducted, which is currently 0.05%.
European equity markets responded with the same pavlovian response we have become accustomed to with previous announcements on monetary policy expansion. The FTSE Eurofirst 300 equity index gained 5.11% for the week as the Euro fell to as low as $1.1116 against the US dollar. The near 20% decline in the single currency since May of last year is a welcome victory for Draghi in the global currency wars, a boost for European exporters. In Asia, China’s Shanghai Composite Index fell by a massive 7.7% on Monday on concerns over tighter controls on margin trading, but these losses were recouped over the rest of the week.
In the bond markets investors continued to front run the ECB’s purchase of government bonds, pushing yields lower. The German 10-Year bond yield dropped to 0.36% while the equivalent yields in France, Italy and Ireland closed the week at 0.54%, 1.47% and 0.91%. A thought-provoking statistic is that 25% of the Eurozone government bond market now trades with a negative yield.
European equity indices opened lower this morning after Syriza, the Greek left wing party, won the general election in Greece with 36% of the vote. The party leader, Alexis Tsipras, has swept to power on an anti-austerity mandate and strong rhetoric on the need for debt relief. At one point, the Athens General Index was down more than 5% with some of the Greek bank shares falling as much as 17%, over concern that the ECB will pull liquidity if the new Greek government decides not to play ball. However, losses have been pared on the news that a new coalition government has been formed with the “far-right” Independent Greeks. While there is still significant uncertainty ahead with Greece, the fact that a government has been formed so quickly has brought some relief.
It is a busy week on the economic front this week. The latest estimate of Eurozone inflation is expected to show a drop to -0.5% in January. There is a raft of data from Japan this week which will provide an update on the Shinzo Abe inspired recovery. There is also GDP data for the fourth quarter from the U.S. and the UK, with both expected to show economic growth eased from the previous quarter. On the monetary policy front, the US Federal Reserve meet this week with no change expected.
Finally, we have seen the magic of the FA cup is alive and well after Bradford City, a team that cost £7,500 to build, beat premier league leaders Chelsea. It is once again a reminder that highly improbable events can happen. The fear for Liverpool is that the “ashamed” Jose Mourinho will inspire a backlash on Tuesday night at the Bridge, in the Carling Cup semi-final.