Back to normal. Calm has reigned supreme in international markets during the month of November, leaving behind the tensions observed in October and resulting in gains among risk assets and a reduction in volatility. This increase in stability is primarily due to two factors: the good GDP figures published by the US in Q3 and the intensification of expansionary messages and the measures from the main central banks. While the Federal Reserve is discussing the strategy to be adopted concerning interest rate hikes, the ECB is insisting on its proposal to extend its asset purchases to other areas, including sovereign debt if necessary. For its part the People's Bank of China has extended the scope of its accommodative actions by cutting official interest rates, dispelling fears of a possible hard landing for its economy. This support of central banks and the good performance of the world economy expected in 2015 are helping to prolong the favourable pattern in risk assets observed over the last few weeks.
The Fed plans its monetary normalisation. Growing economic activity in the United States during Q3 and the improvement in the labour market were sufficient reasons for the Federal Reserve Committee (Fed) to decide to put an end to its QE3. The minutes from its penultimate meeting of the year also revealed some Fed members' concerns over the little inflationary pressure observed, explicitly mentioning the drop observed in long-term inflation expectations. The other internal debate is related to communication policy. Although the institution insists that interest rates will remain low for a considerable period of time, some are in favour of introducing some fine distinctions to this message as we approach what will be the first official interest rate hike in eight years.
The ECB is ready to act. November's meeting of the central bank's Governing Council sent out two basis messages. The first is its commitment to the objective to expand the ECB's balance sheet up to levels close to those of March 2012 (which would entail an additional billion euros) by purchasing asset-backed securities (ABS) and covered bonds, as well as the liquidity tender procedures for banks (TLTRO). Second is that all Council members are in favour of adopting further unconventional measures, should this become necessary. Subsequently, several ECB members have referred to the possible assets the institution may purchase to increase its balance sheet, including corporate bonds and sovereign debt. In this respect, Draghi himself has insisted that the central bank will do whatever it takes to push up inflation and its expectations as quickly as possible. Overall these declarations have been well received by investors. However, there is some degree of scepticism due to the considerable legal obstacles to adopting a sovereign debt purchase programme. The Bundesbank has made a statement along these lines, stating that it is in favour of alternative measures to asset purchases as a means of stimulating the region's growth. Following the announced script, and pending the second TLTRO, in November the ECB carried out purchases both of covered bonds and ABS from several countries in the euro area.
Emerging central banks redirect their strategies. For the first time in more than two years, the Chinese monetary authority has cut its official interest rates for loans and deposits (to 5.6% and 2.75%, respectively). This movement forms part of the plan to sustain economic growth and is in addition to measures to provide retail banks with liquidity and access to funding in the medium term. On the other hand, the central banks of Russia and Brazil have opted to toughen up their monetary policies as a means of tackling the unstable foreign exchange environment and an upward spiral in prices.
Slight upswing in Treasury yields. Now that October's volatility has dispersed, the combination of factors such as evidently solid growth in the US in Q3, the Fed's more optimistic tone and the end of tapering has helped to push up yields on US government bonds, albeit always within a narrow margin. However, several risks may alter the serenity of this market over the coming months. For example, the uncertainty regarding the Fed's «exit strategy» (on this issue, see the Focus «US Treasury term premiums: not yet, but likely») and the negotiations concerning the debt ceiling.
Yields on periphery debt fall, awaiting the ECB's decision. There has been an almost widespread drop in the yield on the sovereign debt of Europe's periphery countries, putting an end to the slight upswing observed during the recent turbulent episode in October. Investor confidence in the bonds of Italy, Portugal, Ireland and Spain has been boosted by the ECB potentially purchasing these countries' sovereign debt as a way to extend its balance sheet. In the case of Spain, one point in its favour has been the successful bond programme carried out by the Spanish Treasury in 2014, achieving a total of 133 billion euros. With regard to German debt, the IRR of the bund has also shown a clear downward trend in November. Nevertheless, the recovery in Europe's economy (boosted by aspects such as the euro's depreciation against the dollar, falling crude prices and accommodative monetary policy) is expected to help sustain a contained rise in German yields in 2015.
Stock markets make up lost ground. Albeit to differing degrees depending on the country, stock markets have been bullish after the corrections seen in October. In the US, the solidity of economic growth and the recovery in corporate earnings have pushed up the main indices, achieving all-time highs in the case of the S&P 500 and Dow Jones. In Japan, the announcement of new monetary stimuli by the central bank, the consequent depreciation of the yen and early presidential elections have pushed up the Nikkei 225 by more than 11% in one month. On the other hand, overselling has prevailed among Europe's stock markets. Doubts regarding the sustainability of economic growth in the euro area and the punishment meted out to bank shares have weakened the incipient recovery in margins for companies in Q3. Nonetheless, the Old Continent's stock markets bounced back towards the end of November and we expect this will continue in the short term due to the good trend in corporate earnings in the present and future.
Corporate bonds are in the firing line. Now that October's dip in confidence has been overcome, corporate bond spreads have narrowed again. The divergence in the monetary strategies adopted by the US, the euro area and Japan looks like becoming the key factor behind corporate debt yields over the coming months. In this final part of the year there has been an increase in bonds issued by financial institutions in the euro area, especially in the segment of convertible contingent bonds (CoCos). This behaviour is due to the ECB deciding to purchase covered bonds as a means of increasing its balance sheet and the possibility that it will extend the range of eligible assets to high quality corporate bonds.
The decisions taken by OPEC are exacerbating falling oil prices, which have reached their lowest level since mid-2010. The continued fall in the price of crude over the last few weeks centred attention on the oil cartel's meeting at the end of November. The decision taken by OPEC members to keep production at 30 million barrels a day has intensified this downward trend, pushing the price of Brent close to 70 dollars a barrel. Nevertheless, this trend is expected to reverse gradually over the coming months as the recovery in global growth is confirmed and oil speculation stabilises.
