Brexitconcerns,ECBpolicyandIndianbonds

The US stock markets again had a rough day yesterday with the Dow Jones and Nasdaq registering a 1.45% and 2% fall respectively. Apart from concerns regarding the heady valuations the very fact that the US parliamentarians were still divided on the pandemic relief bill also played a part. A scaled down coronavirus stimulus offered by senate Republicans was blocked by the Democrats. The US Jobless claim numbers also came in which were slightly worse off than expectations. One silver lining though was on the number of new corona cases for the US which now seem to have stabilized around less than 30k per day. In the US election debates the incumbent government response on the virus has come under sharp criticism and any significant drop in new cases and mortality would help them defend their policies.

Across the Atlantic, concerns regarding the fate of the Brexit deal have started to resurface again as the EU gave Boris Johnson a three week ultimatum to correct the friction caused by the internal market bill. Following this new round of tensions the British pound has fallen from levels of 1.33 to trade at 1.28 currently. Readers would remember that any hard Brexit news impacts the pound negatively.

The major news of the day was the ECB meeting results. Markets were prepared for no action on the rates side but were hoping if there were some further stimulus plans in the offing. Also the point of interest was to know how the ECB looks at the current low inflation scenario and how it looks to rein in the recent rise in the Euro which hampers the region’s exports. In the statement, the ECB kept the rates unchanged and indicated that they will keep the rates low until it sees the inflation outlook robustly converge to a level close to but below 2%. On the Euro issue ECB President said that though they are keeping a close look at the exchange rate they don’t consider it as a monetary policy tool and don’t look to intervene in the market.

Readers would identify that the ECB’s stance on inflation is relatively hawkish as compared to the Fed’s stance of average inflation targeting around 2% released few weeks ago. Any relative hawkishness should result in the euro gaining ground against the dollar. But alas the currency movements hardly listen to such neat rationalizations.

Domestically, we saw the auction of 10000 Cr INR worth of securities under operation twist yesterday. The cut off on the 10 year paper (5.79 GS 2030) came at 5.90 which was substantially better than the prevalent market yield of 5.97. Even such aggressive cut off was not able to save the yields from moving right. The new 10 year 5.77 GS 2030 ended the day at 6.05. There is 30k Crore auction of G sec due today also. The news late night that government will look to complete the borrowing of 12 lac Crore by the month of December itself will play on the yields as it will result in a quantum increase of the weekly supply from current 30k Crore.