TLTRO about OK but not strong enough to reach ECB balance sheet target

Fundamental View

Yesterday saw the S&P post its worst down day since October’s correction with the index shedding 1.5%. The downside seen this week seems to be just a straight forward year-end profit taking move with funds rotating into Government bonds. One of the best trades of 2014, long US Dollar, is also seeing some profit taking and this has helped to push the EURUSD up to test the 1.25 handle this morning. The energy sector endured further pain yesterday as Crude oil prices continued to tumble as WTI crude broke below the $61 handle and Brent crude crossing below $65 to extend 4.5 year lows. OPEC reduced their 2015 demand forecasts and the Saudi Arabian oil ministers said that the only change they would make to production would be to INCREASE production if people wanted more oil! T-Notes continued to push higher with the inverse correlation with stocks seen this week holding firm.

Today’s View

This morning’s key event was the announcement of the ECB’s second round of their TLTRO funding to Eurozone banks. The result showed that banks borrowed €129.84bn which was marginally lower than the expected €150bn. The market’s mindset going into this release was one of nervousness with more people expecting to be disappointed than not. So actually the €129.84bn is just about OK but is not sufficiently strong enough for the ECB to reach their €3trl balance sheet target without full on QE. This afternoon the key data release will be the US’s Retails Sales data for November which covers the all important Black Friday shopping spree. The chances are this number may disappoint as the initial figures from retailers following the Thanks Giving weekend suggested slower than expected activity. We expect the theme of the week to continue today. We favour the downside for stocks on continued year-end profit taking and this helping to prop up the bond markets. We expect the US Dollar to remain on the back foot and for crude oil we look to short any pullbacks with key resistance now at $62.25

Alternative View

If Retails Sales comes in very strong then we may see the dollar rebound and this should feed through positively for stocks and negatively for bonds.