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News & Views: Friday, November 21

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What you need to know for today's trading day.

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This article was originally posted on the Buzz & Banter where subscribers can follow over 30 professional traders as they share their ideas in real time.

ECB's Draghi throws door to quantitative easing wide open as recovery wanes (Reuters)

PBOC Targets Bad Loans With Rate Cut as Property Slump Deepens (Bloomberg)

Citigroup Said to Be Ousted From ECB FX Group for Rigging (Bloomberg)

Abe Dissolves Japan's Lower House of Parliament (WSJ)

Obama to Protect 4 Million-Plus Immigrants From Deportation (WSJ)

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The ECB, through a speech from President Draghi and separate comments from Irish Central Bank Governor Honohan, indicated that QE is an option as soon as its December meeting. Draghi said in his speech that the ECB "must raise inflation as fast as possible" and that the central bank could broaden purchases if the existing policy is not effective because a strong recovery is not likely in the coming months, with Draghi citing yesterday's PMI's for that last fact. Presumably that would include sovereign and corporate bonds, but that is irrelevant for the moment, as is the negative comments from a number of central bankers (South Africa, Sweden, Netherlands) in the last 48 hours that they see QE as ineffective.

The assets showing the largest risk-adjusted return this morning are all corroborating that idea. That includes a lower EURUSD, higher Euro private and sovereign credit, higher commodities (with Brent crude the best on a risk-adjusted basis), higher Euro equities (led by the German DAX on a risk-adjusted basis). Additionally, note that the second worst currency on a risk-adjusted basis behind the EUR weakness is the Swiss Franc (CHF). Yesterday, with the 1.20 EURCHF cap being tested, the Swiss National Bank (SNB) announced that they stood ready to defend that cap immediately if necessary. If the ECB is getting more aggressive then the SNB shouldn't be that far behind them.

On the other side of the world, the People's Bank of China (PBoC) announced this morning that it had cut its 1yr deposit rate by 25bps to 2.75% and 1-year lending rate by 40bps to 5.60%. Additionally, it injected $8.7bln in funds to ease a cash shortage deriving from a heavy IPO schedule that has jacked up money market rates. Although, this is the "first time the PBoC has cut interest rates since July 2012" they have been actively achieving the same results synthetically by lowering reserve requirements and adjusting loan-to-deposit ratios, so it's all a matter of perspective. Chinese equities as indicated by the FXI ETF are up 3% and the ASHR ETF that tracks the CSI 300 is indicated up more than 5%. Miners, cement, and materials stocks are also having a very strong morning.

Overnight, Japanese PM Shinzo Abe dissolved the lower house of Parliament. The next election vote will be held on December 14. Separately, Finance Minister Taro Aso said in comments last night that the sudden yen weakening at this speed is not welcome and has undesirable effects, presumably on others doing business in Asia. However, he said that FX rates are up to the market and it is not something the Japanese governent will intervene on. If you've been paying attention to South Korea lately - the country that stands to be hurt the most from the drop in the Yen - their corporations must be screaming bloody murder to control the relative drop in their export prices.

Data:
- New Zealand credit card spending MoM (Oct) up 1.3%, prior 0.2%
- UK public sector budget (Oct) down to 7.7B GBP vs 7.7B expected, prior 11.2B


Twitter: @MichaelSedacca

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No positions in stocks mentioned.

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