Global daily insight 5 october 2016

Daily Insight

Group Economics Macro & Financial Markets Research

05 October 2016

Gold breaks out of the range on the downside US consumer fal Macro & Financial Markets Research team Tel: +31 20 343 5616 nick.kounis@nl.abnamro.com

Precious metals : Gold breaks out of the range on the downside - Over the past few months, gold prices failed to move higher. This resulted in disappointment among investors.

Yesterday, a higher US dollar and higher US Treasury yields, following hawkish Fed comments (see also next section), triggered a break lower in gold prices. Gold prices lost more than 3%. It is likely that the downside in gold prices has further to go in the near-term.

However, we expect the long-term uptrends to remain in place. This means that gold prices need to bottom out around USD 1,260 per ounce, where the 200-day moving average comes in. If gold prices break below this level, this year’s uptrend is over. For more see our note: Precious Metals Watch – The gates were opened. (Georgette Boele) Global FX: Hawkish Fed talk and stronger data push US dollar higher – This week, currency markets are focused on Fed speakers and the US employment report, which will be released on Friday. At the start of the week the US dollar received support from comments by Fed hawk and voter Loretta Mester. She said that November is a “live” meeting for raising rates. Her comments followed the release of a stronger than expected ISM manufacturing index. Yesterday, hawk and non-voter Mr Lacker said that a pre-emptive rate hike is critical for stable inflation. As a result of this hawkish comment, the US dollar rallied again. If economic data, including the US employment report on Friday, come in better-than-expected, expectations for a rate hike at the November meeting will increase further (our base case is a December rate hike). This should push the dollar higher. As a result, EUR/USD could drop to 1.10 while GBP/USD could move in the direction of 1.25.

(Georgette Boele) ECB: Eurosystem stepped up QE purchases and shifted focus towards corporate bonds - The Eurosystem stepped up its asset purchases in September, a clear sign that the summer lull is over. Indeed, the total monthly purchase amount (EUR 85.1bn) in September is roughly equal to that in June. However, there has been a switch between the asset classes that the central bank is buying. Last month, the focus shifted in favour of corporate bonds rather than government bonds or covered bonds. The total amount of corporate bond purchases increased to almost EUR 10bn in September, compared to EUR 6 to 7bn in the previous months. In contrast, the amount of public sector bond purchases declined to EUR 70bn, down EUR 2bn compared to June. Furthermore, covered bond purchases were just below EUR 5bn versus EUR 6-7bn pre-summer. As a result, the Eurosystem remains ahead of schedule, as it bought more than its average monthly target since the start of the programme. In total, we calculate that the Eurosystem has so far bought around EUR 8bn more. Looking forward, we expect that the Eurosystem will continue to buy at the current pace, with the share of the CSPP becoming increasingly important. (Joost Beaumont) Euro Government Bonds: QE floor removal will bull steepen bond curve – The recent fall in yields has decreased the eligible universe of bonds that the ECB can buy under its QE

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Daily Insight - Gold breaks out of the range on the downside - 05 October 2016

programme. Meanwhile, the eurozone inflation and growth outlook has slowed and is too moderate to generate significant underlying inflationary pressure soon. We therefore expect that the ECB will extend its QE programme by six months from March 2017 to September 2017. Since earlier analysis already showed that the ECB could hit some of its self-imposed QE limits even before the initial deadline of March 2017, the pressure is mounting for the ECB to change its purchase rules. We expect the ECB to announce at its December Governing Council meeting that it will remove the deposit rate as the floor for its purchases.

In addition, the central bank will probably lower the maturity limit and relax the criteria to conduct substitute purchases. Other changes, like increasing the issue share limit and deviating from the capital key, will lead to too much resistance or controversy. By removing the floor, the ECB will create just enough room to facilitate the new targets under its extended programme. In reaction to such an announcement, we expect the euro bond curve to bull steepen, in particular the difference between 5 and 30 year maturing bonds will increase. For more see our note: Euro Rates Watch – QE floor will bull steepen bond curve – for professional clients, please see disclaimers in the document. (Kim Liu)

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Daily Insight - Gold breaks out of the range on the downside - 05 October 2016