13 Apr 2018

ECB minutes weigh on Euro

ECB minutes send EURGBP to 10 month low


The euro dropped back yesterday as the ECB minutes struck a dovish tone, disappointing expectations that the discussion might focus on the end date of the asset purchases and the timing of normalisation of monetary policy. Instead, the ECB raised a number of cautions. Firstly the governing council (GC) urged that the recent removal of their easing bias should not be misunderstood, and that the ECB remained ready to react to shocks (with further monetary easing) if necessary. They also agreed that there was insufficient evidence to suggest that inflation was on track to meet the governing council’s 2% target rate. There were also warnings on the recent strength of the euro, with the GC warning that changes in the currency had been driven by changing views on monetary and fiscal policy, and rising risks of protectionism rather than improvements in the fundamentals of domestic economies. They also warned about wider risks to the global economic expansion as a result of growing geopolitical tension and risk of trade conflict. Altogether the ECB minutes were a fairly grim read, and added fuel to a pullback in the Euro which was already testing support levels against the pound prior to the release of the data. EURGBP set fresh 10 month lows during the course of the day and remains at the bottom of the range this morning.

Syria update

Donald Trump appeared to row back a little on an imminent US-led attack on Syria yesterday when he tweeted that he did not say when action might take place. It could, he claimed, ‘be very soon or not so soon at all’. Nonetheless news reports note a considerable mobilisation of US air and naval resources towards Syria. In addition, the British Cabinet yesterday gave its backing for the UK to support the US. Reports suggest that this could take place either via the use of Gulf based submarines, or the UK’s base at Akrotiri in Cyprus to launch a strike on Syria. One issue is the specific nature of the targets. Trump’s warning tweet on Wednesday appears to have prompted the Syrian government to move its aircraft close to Russian resources in an attempt to discourage a US strike. Even so, a number of commentators are suggesting that action could occur this weekend. In terms of markets, the S&P500 index finished 0.8% up on the day yesterday. However we would note that stocks appear to have been supported by President Trump’s suggestions that the US might be amenable towards restarting Trans Pacific Partnership trade talks in the foreseeable future.

Oil higher as geopolitical tensions intensify

The market is lower this morning, but on Wednesday Brent did trade over 73 $/b, representing a 3 year high. Risk off is the major driver of the bullish undertone seen in the oil markets over the past couple of sessions, with both the WTI and Brent benchmarks hitting fresh YTD highs as the Syrian tensions mounted (WTI hit $67.45/bbl whilst Brent recorded a high of $73.09/bbl). Both contracts remain bid this morning with many investors fearing an massive escalation in geopolitical tensions. US President Donald Trump had been on the wires effectively taunting Russia for supporting Syrian President Bashar al-Assad by saying that missiles “will be coming” in response to a suspected chemical attack on rebels, both Moscow and Damascus have denied any involvement in the attack. The comments by the US President did initially stoke fears of a direct military conflict between Russia and the United States, with the two world powers backing opposite sides in the civil war which has lasted 7 years. Russian/US relations are at a post “Cold War” low with the increased sanctions by US last week only cementing the frosty relations. Analysts are now starting to weigh up what Russia will do when backed into a corner however, as yet, the final outcome is not clear. Given this global backdrop it’s not surprising to see that oil by in large ignored the EIA data overnight. The data showed a build in US crude inventories of 3.3mn bbls to 428.64mn bbls which confirms the API data released the day before.

Economic releases

10.00 EC Trade Balance
13.00 US Fed’s Rosengren speaks
14.00 US Fed’s Bullard speaks
18.00 US Fed’s Kaplan speaks