Vaccinerollout,GoldilockssetupandEurozoneyields

There are some important developments which have happened over the weekend, firstly on the vaccine front. Vaccine shipments across the US have started which aim to reach close to 100 million people by March 21. This is on the back of a mass vaccination program in the UK which started some days back. News of any adverse reaction from the vaccine has largely been limited so far. Even in cases where the recipients have developed some issues, health agencies have not pressed any alarms citing lack of causal relationship.

Markets on their part are watching the vaccine progress with an impish glitter in their eyes as its success takes them to a goldilocks kind of a scenario. Goldilocks refers to a state where everything is just perfect i.e. low interest rate policies coupled with high growth possibilities. Stock prices as we have written previously depend on two things: future earnings and the discount rates at which those earnings will be discounted to the present day. The vaccine takes care of the earnings and growth whereas central banks will take care of the discount rates. How profusely supportive CB actions have been for the yield curve is no where more stark then in the Eurozone economies. Countries like Portugal, Spain, Italy and Greece which were at the epicentre of the European Financial Crisis a decade back and were tied together in an unceremonious acronym like PIGS or PIIGS (including Ireland) are now having 10 year bond yields close to zero. Just for a perspective, the Greek 10 year bond yields traded at close to 37% at the height of the crisis in 2012. Bond buying by ECB under the PEPP program has done its trick!

The other important developments which again support the risk sentiment is some progress on US Stimulus talks where the Democrats appear to be yielding some ground to the Republicans objections. On the Brexit front the two parties have decided to extend the negotiations beyond the Sunday deadline. The pound recovered some ground on the news. The language experts surely need to coin another term for dead line which keeps getting extended.

After ECB last week, we will have Fed this week which will come out with its policy announcement on 16^th Dec. After the Fed has already said “whatever it takes” multiple times in past, it leaves not much scope for saying anything else. The market expectations are that it could decide to lengthen the maturity of the bonds it will buy and also increase the size of the total purchase.

Domestically the Fx reserves continue to rise. As per the WSS published on Friday, the total reserves stood at all time high of USD 579 bn for the week ending December 4^th. That’s an YOY rise of USD 126 bn. The bond yields have been negotiating the bad news on oil front with support of new OMO announcement. The 10 year benchmark yields ended the week at 5.95. Today the CPI data will be released with expectations around 7.2%. As per the law, if CPI inflation remains above 6% for three consecutive quarters then that constitutes as MPC failing its mandate and it needs to give an explanation on why it happened.