ECB extends quantitative easing, oil price surge’s as non-opec countries agree to cut

December 12, 2016

The European Central Bank (ECB) meeting held last week resulted in an extension of its quantitative easing programme to at least December 2017, broadly as expected. However, the rate of purchases has been reduced to €60bn a month from €80bn beginning in April. The neutral market reaction from the announcement indicates that it was in line with expectations. However, the reduction in the rate of purchases combined with the extension of the programme has been a shrewd way for the ECB to begin to withdraw stimulus without rattling markets.

 

Data released last week showed that the UK’s trade deficit narrowed to £2bn in October as exports rose and imports decreased. While monthly trade data is volatile and often revised later, this may be the first indication that the fall in Sterling is beginning to have an impact on trade. An immediate effect is not usually felt from currency movements due to inventories and supply contracts. However, over time, a weaker sterling will encourage consumption from domestic producers at the expense of importers. A weaker sterling may also encourage increased investment into the UK. This has already been seen, with the acquisition of ARM and the bid for Sky last Friday.

Eurozone Central Bank ECB

Further positive news for the oil price came out over the weekend. A group of non-OPEC (Organization of Oil Exporting Countries) countries agreed on a cut to their combined output by 558,000 barrels per day. This was predominately supported by Russia with a pledge of a 300,000 barrel per day cut. However, the remainder of the cut was generated from “natural declines” in output from other countries such as Mexico. Given these reductions would have already been built into estimates, this part of the announcement should not have an impact on expectations. Nevertheless, the oil price opened strongly on the news clearly indicating that there was scepticism on whether any agreement would be reached. However, there is still doubt over compliance to the agreement as OPEC has historically only achieved 80% of the promised cut to production.

 

Index Open Close Change % Change
FTSE 100 6730 6954 224 3.33%
S&P 500 2191 2259 68 3.10%
Dax 10513 11203 690 6.56%
Cac 40 4528 4764 236 5.21%
Nikkei 225 18426 19155 729 3.96%
UK 10 Year Gilt Yield 1.416 1.494 0.078 5.51%

 

UK inflation data for November will be released on Tuesday and the Bank of England interest rate decision will be announced on Thursday. No further cut to interest rates is expected given the resilience of the UK economy since the EU referendum.