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EU could open legal case against Germany over ECB bond-purchases ruling

Last week Germany’s constitutional court issued a decision ruling that the European Central Bank had overstepped its mandate with QE bond purchases,

  • German court in Karlsruhe gave the ECB 3 months to justify its euro zone QE stimulus programme, or the Bundesbank might have to step aside from it
Responding, the European Union’s highest court (which had previously permitted the ECB QE programme) and the European Commission said that EU law holds precedence over national regulations
Further now, on Sunday, EU Commission President Ursula von der Leyen said the EU executive might end up opening a legal case against Germany.
  • “We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings,”
These wort of legal wranglings are not a positive for EU coherency and stability. Nor are they positive for the EUR. Watching for developments on this front – both legal/political and for ECB actions ahead.
 Last week Germany's constitutional court issued a decision ruling that the European Central Bank had overstepped its mandate with QE bond purchases,

European bond yields continue to rise over the past week

10-year German bond yields rise to its highest levels in a month

GDBR10Y

Meanwhile, 10-year French and Spanish bond yields have both climbed to their highest levels since May 2019 to start the day. This comes as we also see Treasury yields rebound higher, with 10-year yields up by 10 bps to 0.82% currently.
It is tough to try and make sense with what is happening in the market because things change so quickly but I would argue that the selloff in European bonds isn’t exactly a good sign for the euro currency in general.
I would say the rise in Treasury yields represents a bit of a disconnect because the move higher there reflects more closely the slightly better risk mood today – which is also helping USD/JPY to stay underpinned, alongside gains in the dollar today that is.

ECB leaves rates unchanged, announces new LTRO, expands QE by 120B

ECB announces measures

No changes in any rates
  • ECB raises monthly bond purchases by 120B by year-end (not per month)
  • Additional LTROs will be conducted to provide immediate liquidity
  • Says considerably more favourable terms will be applied during period from June 2020 to June 2021
  • Rates on new LTROs will be 25 bps below average rate applied in eurosystem’s main refinancing operations
  • Raises amount taht counterparties can borrow in LTROs to 50% of their stock of eligible loans
  • Continue to expect QE programs to run as long as necessary and end shortly before ECB ready to raise rates
The market was sniffing around for an interest rate cut and it didn’t come. The euro has risen

Italian bonds surge higher on Salvini defeat

Italy 10-year bond yields down by over 15 bps to start the day

Italy 10-year yields

  • Italy’s Democrats defeat Salvini’s league in key regional vote
Chances of a snap election is less likely now and that is giving more confidence to Italian assets to kick start the week. Just be reminded that Salvini is the number euroskeptic figure in the country and the result above will bolster Conte’s government a bit more.
The more positive take on the move in Italian bonds today is better reflected in the BTP/Bund spread, where we’re see a significant narrowing in the spread today (141 bps now):
Italy Germany spread

Here is what’s on the economic calendar in Asia today – almost bare

2350GMT will bring data on weekly flows of securities (stocks/bonds bought/sold) from Japan.

Upon release these tend to have a negligible impact on forex (unless there is some reason for the market to be focused on them at the time).
Apart from some info due from South Korea and Singapore that’s about it.

US auctions off 30 year bond at 2.170% vs WI level of 2.169%

US auctions off $16 billion of 30 year bonds

  • High yield 2.17% versus WI of 2.169%
  • Bid to cover 2.25x vs six-month average of 2.23x
  • Dealers took 22.94%. vs six-month average of 27.3%
  • Directs 18.5% vs six-month average of 18.8%
  • Indirects 58.5% vs six-month average of 67.2%
the US treasury completed its refunding by selling 16 billion of 30 year bonds at a high yield of 2.17%. That was slightly above the 2.169% level at the auction time. The bid to cover was near the six-month average. Dealers took a lower percentage than the average at 22.94% suggesting a distribution of the auction to nondealer participants.
Give the auction the C+ to B-

A look at the US-China trade war and its impact on markets

The impact escalation will have

The impact escalation will haveThe focus of the market on the China-US trade war is acute due to China’s and the United States economic weight. In 2018 the US’s GDP was above $20 trillion and China’s GDP over $14 trillion, which makes them the world’s two largest economies by nominal GDP.

Furthermore, consider that when you add these two countries GDP together, they account for more than 40% of the world’s entire GDP. So, the first point to grasp is that the significance of a US-China trade war is really a global growth problem.

When you factor in the alliances and trade partners of both countries, the legitimate concern is that a China-US trade war spills over across the entire globe and slows down the entire world economy.

Trade between the US and China

(more…)

Jason Zweig’s Rules for Investing

1. Take the Global View: Use a spreadsheet to track your total net worth — not day-to-day price fluctuations.

2. Hope for the best, but expect the worst: Brace for disaster via diversification and learning market history. Expect good investments to do poorly from time to time. Don’t allow temporary under-performance or disaster to cause you to panic.

3. Investigate, then invest: Study companies’ financial statement, mutual funds’ prospectus, and advisors’ background. Do your homework!

4. Never say always: Never put more than 10% of your net worth into any one investment.

5. Know what you don’t know: Don’t believe you know everything. Look across different time periods; ask what might make an investment go down.

6. The past is not prologue: Investors buy low sell high! They don’t buy something merely because it is trending higher.

7. Weigh what they say: Ask any forecaster for their complete track record of predictions. Before deploying a strategy, gather objective evidence of its performance.

8. If it sounds too good to be true, it probably is: High Return + Low Risk + Short Time = Fraud.

9. Costs are killers: Trading costs can equal 1%; Mutual fund fees are another 1-2%; If middlemen take 3-5% of your cash, its a huge drag on returns.

10. Eggs go splat: Never put all your eggs in one basket; diversify across U.S., Foreign stocks, bonds and cash. Never fill your 401(k) with employee company stock.

Daiwa to launch 'Trump-related' mutual fund

Daiwa Asset Management is set to start operating a mutual fund that invests in stocks related to U.S. President-elect Donald Trump’s infrastructure investment policy. Daiwa will launch the product on Tuesday.

The open-end mutual fund — the first of its kind in Japan since Trump’s election victory in November 2016 — is likely to be made available to retail investors by the end of the month.

 The U.S. infrastructure builder equity fund, which invests in U.S. companies, will quantify how much each stock will benefit from Trump’s infrastructure policy, based on criteria such as sales ratio in the U.S. and the degree of obsolescence of the target infrastructure. The details of the portfolio will be determined by how much share prices are undervalued and how competitive the companies are.

The portfolio, comprising 30-50 companies — mostly in the construction, transport and materials sectors — will be adjusted as appropriate as Trump’s policy takes form.

Trump has pledged to spend $1 trillion to overhaul the country’s aging infrastructure over the next decade.

Trading vs investing

But let’s use a couple of examples:
– trading: I buy a basket of stocks this morning with the intention of reselling before the close
– investing: I build a portfolio of stocks with the intention to keep it a relatively long time, because I think that these stocks value will increase due to whatever reason, growth, value, the economy…

I also like the following classification, which I believe comes from Minsky:
– Profits on the position neither depend on price variation of the asset, nor on cost of carry: I am investing.
– Profits do not depend on price variation, but only on positive carry: I am trading.
– Profit depend on price variation of the asset: I am speculating.

The example and the definition are not equivalent, but they give a rough idea of what trading is and what investing is. The border between both activities can be blurry. But if you invest, you do not need a market. You can buy a bond with the intention of holding it to maturity. If you trade, you need a market to close the trades.