Friday March 11 Market Primer

Super Mario (ECB President Mario Draghi) announced a “yuuge” package of Eurozone economic stimulus yesterday, which included a 10 basis point cut to the deposit rate, an increased the bond buying program to 80 billion euro per month from 60, and introduced long term liquidity provisions which lend money to banks at -.4%.  This is essentially paying banks to borrow money which they can then lend out at positive spreads, encouraging credit creation and borrowing by corporations.  Mr. Draghi also said he didn’t see the need for further rate cuts.  European markets have done around trip, initially surging, then reversing yesterday, and are now up strongly on Friday, and the Euro shot up, with several theories out there to explain the market action (last story).   Stock markets were flat in the US yesterday, up all across Asia, and are opening up about 1% this morning.

Here’s the news:

European markets surge

The Stoxx Europe 600 index climbed 2.4 percent by 10.45 a.m. London time, with the gains led by euro area banks which saw a rally of over 6 percent in the Euro Stoxx Banks (price) Index of over 6 percent. Italy's FTSE-MIB gained 4.1 percent, while Germany's Dax was 2.7 percent higher. The gains come as traders reassess the policies announced by Mario Draghi at yesterday's ECB meeting. Euro bond markets are also rallying, with spreads between Italian and German 10-year securities tightening. This morning Italy sold three-year bonds with a negative yield for the first time. 

Global rally

The gains are not limited to European stocks, with the MSCI Asia Pacific Index adding 0.7 percent overnight while S&P 500 futures were 1.1 percent higher at 11:15 a.m. London time. U.S. Treasuries are not taking part in the fun, however, as demand for their relative safety eases amid the rally. Investors are also keeping an eye on next week's Federal Reserve meeting. Gold is also lower.

IEA says oil may have bottomed

Oil prices may have passed their lowest point as high-cost production shuts down and Iran production returns to the market more slowly than previously estimated, the International Energy Agency said this morning. Goldman Sachs Group Inc. are also turning slightly more bullish on the commodity, putting their price target for a barrel of oil between $25 and $45 for the second quarter of 2016. Oil futures climbed 2.7 percent to $38.85 a barrel on the New York Mercantile Exchange at 11:20 a.m. London time.

Yuan erases 2016 loss

China's currency advanced to its strongest level since December after the country's central bank raised its daily reference rate by the most in four months. The move comes as the People's Bank of China finishes mopping up the extra liquidity it had injected into the banking system over the Lunar New Year Holidays. In a sign that the country is seeking to address its bad-debt problem, the central bank, along with the country's top economic planning agency, are drafting rules that will make it easier for lenders to convert bank loans into equity stakes in debtor companies.

Brazilian crisis

The political crisis in Brazil caused by the vast corruption probe known as Operation Carwash is moving closer to the country's president. Dilma Rousseff’s government risks losing an ally in parliament this weekend as the Brazilian Democratic Movement Party seems set to declare its independence from the government at its national convention tomorrow, meaning its members could vote as they please on bills and, importantly, impeachment proceedings. Brazilian stocks are at their highest level since August as pressure increase on Rousseff.

The UK's trade deficit with the EU hit a record. Data from the Office of National Statistics showed that the UK's trade deficit widened to £10.3 billion ($14.7 billion) in January, in line with estimates. Notable is that the UK's trade deficit with the European Union expanded to £8.1 billion for the month and £23 billion over the past three months, both records according to Bloomberg. This will surely be a talking point of those campaigning for a British exit from the European Union at the June 23 referendum. The British pound is stronger by 0.2% at 1.4303.

Pimco thinks the ECB might eventually buy blue-chip stocks. The markets' reaction to the ECB rate cuts had many market participants discussing the possibility that the ECB was "out of ammo." But Pimco managing director and portfolio manager Adam Bosomworth doesn't think so. In an opinion piece written overnight, he suggested that the central bank would use asset purchases to stimulate the economy and that the purchase of blue-chip stocks was "not a far step away."

Deutsche Bank warns that Q1 will be rough for banks. Volatile financial markets will pose a challenge for the entire banking sector in the first quarter, Deutsche Bank warns. This seems to jive with comments from other investment banks like JPMorgan and Citigroup, which have previously warned about tough conditions. "Deutsche Bank is no exception to this," CEO John Cryan said in the company's annual report, which was published Friday. "Nonetheless, in this period of market turbulence, Deutsche Bank remains very solid."

Singapore is the most expensive city to live in. On Thursday the Economist Intelligence Unit released its report titled "Worldwide Cost of Living." It showed that Singapore was the most expensive city in the world to live in when taking into account factors including food costs, fuel costs, and salaries. Rounding out the top three were Zurich, Switzerland, and Hong Kong. US cities making the top 10 were New York (No. 7) and Los Angeles (No. 10).

Noyer: "Brexit" would cost London euro-trading dominance
London could no longer be the hub of euro-denominated trades should Britain vote to exit the EU, says Bank of France Governor Christian Noyer. "It is already very difficult for euro members to accept that our currency is largely traded outside the currency area, beyond the control of the [European Central Bank] and of euro area institutions such as market regulators," Noyer wrote in an article. Bloomberg

SEC's Stein wonders how to apply fiduciary standard to robo-advisers

Securities and Exchange Commission member Kara Stein said the agency faces the difficult question of how to hold robo-advisers to a fiduciary standard. "What would a fiduciary duty mean to a robo-adviser?" she said. "Or, suddenly, is there no fiduciary duty if it's automated advice?" InvestmentNews (10 Mar.)

Vanguard rolls out inexpensive core bond ETF

The Vanguard Group has brought to market a core bond fund with two share classes. The actively managed Vanguard Core Bond Fund buys a mix of primarily investment-grade corporate debt, asset-backed bonds, mortgage-backed bonds and Treasurys. Barron's (free content) (10 Mar.),

A Sunshine State

The four remaining Republican presidential candidates squared off in Miami in a debate that featured a much more civil tone than previous meetings. Donald Trump—who for the first time said he may take political contributions in a general election—refrained from attacking his three rivals, who highlighted their differences with the front-runner in a restrained manner. The candidates sparred on foreign policy, Social Security and education ahead of a slate of key primaries next week—including must-win home races for Ohio Gov. John Kasich and Florida Sen. Marco Rubio. We report that many voters who were long-time supporters of Ohio’s other son, former House speaker John Boehner, are backing Mr. Trump in his bid for the nation’s highest office, a development that reflects a broader frustration among Republican voters that has helped catapult Mr. Trump to within reach of the nomination. Meanwhile, we find Ted Cruz is struggling to get endorsements from his senate colleagues.

A Hero’s Journey

Warner Bros. is undertaking a super challenge. The opening-soon “Batman v Superman” is the next installment in the Hollywood studio’s ambitious plan to launch 10 films in five years based on DC comics characters. Taking on rival Disney and the success of its pioneering concept of a series of interconnected movies based on Marvel Comics characters, Warner is hoping it can bank on Wonder Woman, Aquaman and Flash to draw audiences for years to come. It has tapped the Oscar-winning writer of “Argo” to tell the superheroes’ tales, who studied electromagnetic physics, deep sea biology and ancient history to better understand the iconic characters.

US economic data is light. Import and export data will be released at 8:30 a.m. ET. The US 10-year yield is up 1 basis point at 1.95

Banks are reaching for renewable short-term funding to satisfy longer-term funding rules.

Wall Street's frustrated Chinese bankers are heading home.

Iron ore sags towards $50 as 'insane' advance gets rolled back. 

Keystone Operator in Takeover Talks With U.S. Pipeline Company

Goldman Hire Came as Bank Pitched Malaysia’s 1MDB

Bridgewater Hires Ex-Apple Executive as Co-CEO

The last 24 hours have given us some wonderful examples of how people come up with narratives that fit price action in the market. When the European Central Bank first unveiled its 'kitchen sink' measures to boost the economy, investors seemed thrilled. Then when ECB President Mario Draghi began talking, offering hints that he was not inclined to pursue further rate cuts, markets erased their gains and the euro shot up. Suddenly everyone had a story to explain the whipsaw action. One popular line was that markets were rebuking central banks everywhere these days, regardless of what they did, which fits into the 'out of ammo' theme. Another popular narrative was that markets just hate negative rates. Yet another angle was that markets liked the measures, but then Draghi blew it at the press conference with some unfortunate language. But today you have to rip all those narratives up, because the euro is tumbling again and markets across Europe are in rally mode. Bank stocks, in particular, are on a tear, surging around 6 percent. So what's the latest story? Now the emerging narrative is that it's not about the ECB's interest rates anymore, it's all about the other measures (the asset purchases, the targeted loan programs) that will do the heavy lifting and that these are powerful tools that will drive money into the economy.

 Source: Bloomberg, BI, WSJ, CFA Institute Financial Newsbrief