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27 Dax Shrugs ECB

Article By: ,  Financial Analyst
December 6, 2012 4:40 PM

Euro sells off on a combination of downward revisions in growth and inflation as well as Draghi’s indication that discussions over interest rates remained ongoing. The possibility for the refinancing rate to reach 0.25% without the OMT having been deployed would be deemed excessive accommodation from the ECB in the face of a reticent Spain.

ECB downgrades 2012 GDP to -0.6% to -0.4% (from previous -0.6% to -0.2%) and 2013 GDP to -0.9% to 0.3%. Inflation in 2013 shall remain contained at 1.1% to 2.1%

OMT’s Durable Impact 

The OMT program announcement was aimed at enabling Spain to request a bailout, but it could well end up eliminating such an event thanks to the stabilising environment created by the September announcement. The positive impact of the OMT announcement on risk metrics has been impressive to say the least:

1.     Peripheral sovereign bond yields have fallen 25-30% from their August highs.

2.     The Nov rebound in peripheral bond yields prompted by the post-Obama global market selloff proved relatively short-lived compared to the decline in global equities -8% in equities, -15% in 10-yr yields, -11% in oil and -6% in gold.

3.     Even the euro’s November selloff  paled in comparison to equities, with a 3% decline from its Oct highs in contrast to a 6% fall in the S&P500.

As the next episode of risk aversion re-emerges, Eurozone markets (periphery bonds & currency) are no longer necessarily fair game thanks to Draghi’s backstop. Even if the OMT is contingent upon another country’s decision to request aid, there is always the LTRO option, which could be adjusted via duration (rumours the next one could be five years) according to the required intensity. At a time when even Troika recognized the adverse global macro picture to be a factor in Greece’s difficulty to meet its debt targets, there are always additional tools for the ECB to use in order to contain contagion (OMT, LTRO & rate cut).

German Dax +27% YTD, New year highs & Golden Cross

Germany defies gravity as the Dax outperforms G7 peers with a 27%  rise YTD (US S&P+10%, UK +6%, Japan  +13%, HK +21%, France +14%, Spain -8%, Italy +8%). Dax performance is matched by only India’s Sensex, which is also +27% YTD.

The index has not only broken a trend line resistance extending from 2007, but also undergoes a Golden Cross, whereby the 55-week moving average crosses above the 100-week moving average for the second time in four years.

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