DAX Inches Higher Driven By Euro Weakness

Markets are now tracking BOJ Governor Haruhiko Kuroda’s post-meeting briefing, which began at 0630 GMT, for clues on how long the central bank could hold off on whittling down stimulus given stubbornly weak inflation.

Given the political situation in Europe right now, most notably Italy, and the prospect of a trade war with the United States, the European Central Bank will want to be extremely careful with exiting QE and laying the groundwork for a potential rate hike next year. Since before 2012, the Bank has been gradually lowering the interest rate.

Euro Zone bond investors responded immediately to the dovish response by the European Central Bank, cutting the chance of a 10 basis point rate hike by July 2019 from 80 percent before the meeting to just 30 percent by the close of the session.

The move topped a slide caused in October, when policymakers said they would halve the pace of bond buying from 60 billion euros (US$69.62 billion) – sugarcoating the news by extending the duration of the asset purchase program. Short term rate forecasts were shifted marginally higher, with the median dot for this year indicating two more rate increases were on the cards, suggesting that the central bank is on course to hike again in September and then again in December.

The ECB’s statement reflected the battle between hawks and doves on the bank’s council, with the decision on QE matched by a softening of its approach to interest rates. In 2017 unemployment in the Eurozone stood at 8,5%, which is the lowest in a decade but still not quite as low as other major economies. But it could also increase returns for savers and make it easier for pension savings to grow.

The euro, meanwhile, touched on its steepest one-day drop against the US dollar since June of 2016, while the dollar accelerated to a two-week peak.

The European Central Bank said Thursday it would end in December the mass bond-buying used to buttress the eurozone economy, in a sign of confidence in the outlook for growth and inflation in the bloc. Although it might seem like a positive development, markets’ enthusiasm for the Euro sank when it appeared that interest rates would remain stagnant through the summer of next year. 10-year Treasurys yield 2.95 percent.

Italian bond yields rose sharply this month as a new government of anti-establishment parties promised higher spending. At various times the parties have also questioned Italy’s membership in the euro, though the finance minister this week calmed markets by saying the country has no intention to leave. The initial plan was to buy bonds worth Euro 1 trillion.

The Hong Kong Monetary Authority (HKMA) raised the base rate charged through overnight discount window by 25 basis points on Thursday to 2.25 per cent after the Fed raised interest rates by a quarter of a percentage point.

The stimulus on both ends was unprecedented in size.

The size of the stimulus was enormous: At €2.7 trillion, it rivals the entire value of the French economy previous year.