Mario Draghi hints eurozone stimulus will last - as it happened

Angela Monaghan (until 1.45) and Nick Fletcher

from on 2016-11-18 18:12 (#222HP)

The president of the central bank has signalled monetary support will persist amid a fragile eurozone recovery and weak inflationary pressure

6.11pm GMT

The oil price has been dominated in recent days by the strength of the dollar weighing it down, and hopes of an agreement to cut output at Opec's meeting at the end of the month giving some support.

But the weekly US inventory numbers also have an impact, as do the Baker Hughes surveys of the number of operating rigs.

5.39pm GMT

The recent fall in the euro against the dollar brings closer the possibility of the currencies reaching parity. Fawad Razaqzada, market analyst at Forex.com, said:

As the week draws to a close, the euro/dollar is still limping, now below 1.06. It could absolutely collapse next week as the dollar appreciates further. The market seems convinced that the Fed will hike interest rates in December and tighten its belt further in 2017. Meanwhile the ECB and other major central banks are widely expected to maintain their current extremely loose policy stances intact well into 2017 at the very least. As such, the dollar is getting stronger across the board, but especially against currencies where the central bank is still uber-dovish such as the euro...

To get anywhere near parity, the euro/dollar will first need to break and then hold below the prior support around the 1.0460/1.0525 area. As things stand, this looks like a good possibility... However, as always, it is worth remembering that the markets are forward-looking. As such, the outlook for the diverging monetary policy stances in the Eurozone and US may already be priced in, if not fully then maybe partially. But price needs to confirm this view by creating a distinct reversal pattern. Until and unless such a technical signal is generated, the path of least resistance remains to the downside.

5.06pm GMT

Despite a record high in the US tech-heavy market Nasdaq (subsequently reversed), European shares have ended the week on a downbeat note. The continuing uncertainties over Brexit and Donald Trump's victory in the US presidential election have made investors in Europe cautious. And with the next possible electoral shock coming next month in the Italian referendum, it is the Italian market that bore the brunt of the day's losses. Jasper Lawler, market analyst at CMC Markets, said:

A record high in the Nasdaq and a pullback in bond yields helped to unwind some of the early losses in stock markets, though most European equity benchmarks finished the week on a soft note.

Election fever has caught the investing world. With populism running amuck and Italy's referendum up next, Italian shares have been the notable losers this week.

Today's price action serves as a metaphor for the entire week, indecisive, with a firm dose of caution after the volatility of last week. Stocks are modestly lower across the board, but for different reasons. Investors in the UK and Europe know that weakening currencies have flattered performance this week, while in the US they remain overextended to the upside. The former worry that a period of weakness for the US dollar after such a strong run could increase the chances of a correction for stocks, while the latter are wondering how long the market can keep moving higher even as the currency rises.

3.57pm GMT

Another public appearance by a Federal Reserve member, another step towards a rise in interest rates next month. Kansas City Fed president Esther George told an oil conference in Houston the Fed should move "sooner rather than later" but be cautious. She said:

My view is that monetary policy should .. slowly raise the federal funds rate to promote maximum employment commensurate with the economy's long-run potential to increase production.

I do not think it will serve the economy well. I do think we have to move more systematically.

3.17pm GMT

While US markets have been hovering around new highs, Europe has been struggling to keep up. Fiona Cincotta, market analyst at City Index, said:

European equity markets have failed to make much progress one way or the other this week, kicking the week off and ending it at more or less the same level. The post-election Trump rally is seen to be wearing thin this side of the Atlantic, as investors digest the growing divergence between European and US economies and the outlook for monetary policy.

The dollar has continued its ascent in the wake of Yellen's hawkish testimony before Congress, where her positive comments regarding the US economy have spurred the currency to break through 101.00 and hit fresh 13 year highs.

Yet while Yellen was more or less confirming a rate hike in December and several rate hikes for next year, European Central Bank President, Draghi was clearly on the other side of the fence. Draghi stated that the Eurozone recovery was reliant on ECB stimulus possibly hinting that ECB monetary stimulus will continue beyond its planned conclusion next March. As a result, the Euro has continued to sell of against the dollar and is currently at $1.0609 setting its sights on $1.04 against the dollar going forward...

Gold, like bonds, has been one of the more noticeable losers of a Trump president elect, with the precious metal falling over 10% since he clinched the White House. With plans for reflationary policies such as a $1trillion spending spree on infrastructure and control of both houses meaning political gridlock is less likely, inflation expectations have risen sharply, along with debt yields and interest rate hike expectations. Hawkish comments from Yellen in her testimony to Congress renewed selling pressure on gold and given that the US dollar index is trading at fresh 13 year highs, we could see expect to see a more significant correction yet, the trend remains bearish [and] precious metal miners could be set for more pain to come.

2.51pm GMT

With a US interest rate rise next month now seen as almost inevitable, US markets are taking a breather after their recent highs.

The Dow Jones Industrial Average has dipped 23 points or 0.12% while the S&P 500 has edged up 0.09% and the Nasdaq Composite is 0.19% better.

2.26pm GMT

The euro may be weakening against the dollar today, but there is no doubt which continues to be the worst performing currency this year:

The pound remains the worst performer this year among major currencies.https://t.co/iBak2Lu2zf via @@NettyIsmail pic.twitter.com/fmtcxb45uv

2.22pm GMT

Back to Brexit, and the impact it may have on Ireland. Henry McDonald in Belfast writes:

One of Northern Ireland's leading economists has warned that if the UK leaves the European Customs Union then a 'hard border' between the region and the Irish Republic is inevitable.

Ulster Bank's chief economist in the province Richard Ramsey also told a Dublin Business School conference on Brexit on Friday that the Northern Ireland government's policy of a low corporation tax - 12.5% as in the Irish Republic - has "fallen far down the agenda" due to the UK voting to leave the European Union.

1.56pm GMT

The US, on the other hand, is set for a rate hike in December, most economists believe. Federal Reserve chair Janet Yellen hinted as much when she gave her testimony to Congress on Thursday, and Fed board member James Bullard has become the latest to back such a move. Reuters reports:

Federal Reserve policymaker James Bullard is leaning toward supporting an interest rate increase in December, he said on Friday, adding that a plethora of potential changes under incoming president Donald Trump could affect future policy.

St. Louis Federal Reserve President Bullard said the debate is now shifting toward the Fed's rate path in 2017 and how Trump's policies on taxes, infrastructure, spending and regulation will affect growth, productivity and ultimately Fed policy.

"Markets are currently putting a high probability on a December move by the FOMC. I'm leaning toward supporting that," Bullard, a voting member of the U.S. central bank's rate-setting committee, told a conference in Frankfurt. "I think the question now is more about 2017."

Markets now put a 90 percent chance on the Fed hiking rates by 25 basis points on Dec 14.

1.50pm GMT

Strong economic data from the UK - the latest being better than expected retail sales figures for October - have put the idea of an interest rate cut on hold. Indeed, the next move is likely to be upwards, despite the Bank of England maintaining it was keeping its options open. But don't expect a hike too soon, or indeed a hefty rise when it comes:

There's a lot of chat about the *improving* interest rate outlook. Markets reckon you should set your watch for 1% around 4 years from now. pic.twitter.com/zlIBSqgpbK

1.40pm GMT

After an action-packed week highlighted by Barack Obama's 30-hour visit to Athens, the Greek government has stepped up calls for debt relief, with officials saying it is only a matter of days before the country concludes a second bailout review that can formally open discussion of the issue.

In an interview with the Wall Street Journal, Greece's straight-talking finance minister Euclid Tsakalotos said it would be "very shortsighted" if Greece's monumental debt pile was not cut, echoing Obama's assertion that people needed hope.

If the euro zone is going to survive, the number-one requirement is to make sure people see that the eurozone can solve its problems. If it just postpones political decisions and kicks the can down the road, then people will say it's not working.

1.31pm GMT

As Philip Hammond prepares to present his maiden autumn statement on Wednesday, speculation is mounting about possible rabbits out of hats.

With no immediate economic crisis to deal with, the new chancellor Phillip Hammond is unlikely to pander to markets' desires and announce a major fiscal stimulus at next week's autumn statement.

Despite the better-than-expected near-term economic performance, the long-term economic outlook remains highly uncertain.

12.44pm GMT

Volkswagen, the German carmaker, is cutting 30,000 jobs as it restructures the business following the diesel emissions scandal.

12.14pm GMT

First Toblerone, now Maltesers:

Maltesers pouches have 'lost weight' according to one food retail expert https://t.co/uI4FiFGYdd

11.54am GMT

Lord Wolfson, chief executive of Next, has told consumers to expect price rises on the high street from January, as the weak pound starts to feed through.

I would expect it to begin to come through January next year. And really that inflationary bubble will last all year. But it is a one off bubble, it's not likely to affect us the following year. It's not likely to affect retail anything like as much as the devaluation of the pound.

So the pound's fallen 15, 20%. We're expecting prices at most to go up 5% but I'm expecting a bit less than that. And the reason for that is because there's a lot of spare capacity in factories in the far east and retail is constantly looking for new and better sources of supply, cheaper sources of supply. So I think we'll be able to mitigate most of the currency fall. But we're still looking at prices rises around 4-5%.

11.28am GMT

JCB's Staffordshire HQ hit by mini Tornado

11.16am GMT

David Rees, senior markets economist at Capital Economics, says the bonds sell-off in emerging markets is likely to continue:

Dollar-denominated government bonds have suffered disproportionately during the emerging market sell-off since Donald Trump won the US presidential election. We expect dollar-denominated bonds to continue to underperform equities and currencies.

Whereas equity prices have fallen by 3.5% on average in local currency terms since the November 8th election, and currencies have depreciated by a similar amount against the US dollar, dollar- denominated sovereign bonds have registered losses of nearly 4.5% on average.

10.54am GMT

Global bonds are on course for their biggest two-week loss in more than a quarter of a century, as rising inflation dampens demand.

Barclays Global Aggregate Bond Index is set for a 4% loss over the last fortnight - the biggest since at least 1990 according to Reuters.

Donald Trump's shock win in the US election last week has stoked bets that economic plans under a Trump administration would boost business investments and spending while firing up inflation.

Rising inflation erodes the value of bonds which offer set interest rates over their lifespan.

10.31am GMT

Ben Broadbent, the deputy governor of the Bank of England responsible for monetary policy, has been speaking in London.

He insisted the prolonged spell of ultra-low interest rates had not driven a rise in inequality in the UK. The Bank has been under fire in recent weeks by critics who claim the loose monetary stance has hurt some households.

"If you are a forecaster you are used to being humbled", BoE's Ben Broadbent going for quote of the month

10.13am GMT

Europe's major markets are now firmly in the red:

10.03am GMT

Lord Jim O'Neill, the former chief economist at Goldman Sachs, is joining the Northern Powerhouse Partnership, set up by the former chancellor George Osborne who chairs the thinktank.

Having been involved in its inception, I have always been a huge supporter of the Northern Powerhouse and through my participation in the Northern Powerhouse Partnership I look forward to continuing to play a role in ensuring that the original vision becomes a reality.

Today is a milestone in the creation of our Northern Powerhouse Partnership. Our first board meeting, here in Sheffield, brings together some of the north's biggest employers and civic leaders to see how we can work together to create a powerhouse.

I am delighted that Jim O'Neill and John Cridland are also joining the board and getting involved in the Northern Powerhouse Partnership. They are both hugely regarded figures across the North and two of the brightest and the best when it comes to thinking proactively about how to drive transformational change for the region.

9.20am GMT

Here is what Draghi had to say on eurozone inflation:

Despite the recovery in growth and employment, the persisting output gap is still keeping inflation dynamics weak. The October inflation rate stood at 0.5%. While this marks the highest level recorded in almost two years, it remains far below the ECB's objective [of below, but close to 2%].

And while we expect headline inflation to continue rising over the coming months, much of this increase will be driven by statistical factors related to the mechanical unwinding of the extreme oil price declines a year ago. We do not yet see a consistent strengthening of underlying price dynamics.

The euro area recovery still relies to a considerable degree on accommodative monetary policy. The recovery in credit is being facilitated by a more resilient banking sector, but the impetus comes from our monetary policy.

9.04am GMT

Draghi's speech strikes a decidedly dovish and cautious note. He suggests that while the eurozone is in reasonable shape, key risks to the recovery remain.

We have ... every reason to be more confident in the strength of the recovery than we were one year ago. But we cannot be sanguine over the economic outlook.

Besides the geopolitical risks that remain prevalent, there are indeed three factors that warrant caution: the profitability of euro area banks, the relative weakness of inflation dynamics, and the dependence of the recovery on accommodative monetary policy.

Draghi: 3 factors warrant caution: bank profitability, relative weakness of inflation dynamics and dependence of recovery on monetary policy

8.40am GMT

Mario Draghi, the president of the European Central Bank, has given a clear signal that policymakers will continue to support the eurozone economy with monetary stimulus.

Even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support.

The ECB will continue to act, as warranted, by using all the instruments available within our mandate to secure a sustained convergence of inflation towards a level below, but close to 2%.

8.27am GMT

The FTSE 100 is slightly down in early trading, after closing up 45 points or 0.7% on Thursday.

Elsewhere in Europe, markets are mixed. Nerves persist in Italy, where bond yields are sharply higher as political concerns rise to the fore ahead of next month's referendum.

8.18am GMT

Holger Schmieding, economist at the German bank Berenberg, says the ECB won't be in any hurry to follow the Fed and tighten monetary policy.

Pundits including us expect the ECB to prolong its current a80 billion monthly asset purchases by at least three and more likely six months beyond March 2017 before finally starting to taper, announcing that decision to extend purchases at its 8 December meeting.

In addition, the ECB will likely make some technical changes to its programme to broaden the scope of eligible (German) paper without changing the capital key distribution of purchases or breaking new ground by venturing into purchases of major new asset classes such as bank bonds or equities.

8.15am GMT

The euro against the dollar over the past year:

8.01am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

The dollar's gain is the euro's loss, with strength in the US currency pushing the euro below $1.06 for the first time in almost a year. It is currently trading at $1.0596.

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