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All posts by Raphael Daune

Why the ECB hardly revive the European Economy

4th December 2015 by | News | No Comments

This Thursday, December 3, the economic world was watching Frankfurt (Germany). The European Central Bank was indeed supposed to announce new measures against the low inflation and sluggish growth in the Eurozone. It’s a fight that it has led for months. And that raises a key question: why all the measures taken launched by the monetary institution are so slow to produce effect so far?

First, we must remember that the mandate of the ECB is to stabilize price developments around the target of 2% – a rate considered synonymous with good health of the economy. But to achieve it, it has set a series of interim targets, like the revival of bank credit. To which were added during the crisis, “informal” objectives, such as the depreciation of the euro … For what results? Some of these measures have proven very effective, while others are a huge failure… Here’s why:

“QE”, negative deposit rate: tools increasingly audacious

That was a very long time ago when the main tool of the ECB was limited to determining its policy rate – that is to say the cost of money … Once this one was down near the minimum (0.05%), the institution has invented new weapons to act on the economy.

The last and most massive of them is the quantitative easing program announced in January 2015 which began two months later. It consists of purchases of public and private debt markets, initially set at 60 billion euros a month, until September 2016″. To do so, the ECB injects newly created money into the financial system in the hope that it will reach, ultimately, to households and businesses. Unfortunately, the ECB probably launched its QE too late, which limits the effectiveness. The US Federal Reserve began his program in 2008 and the Bank of England in 2009…

Another weapon is the deposit rate negative, set at – 0.10% in June 2014 and to – 0,20% in September of the same year. It is equivalent to tax banks for cash they let sleep in the safes of the ECB, and would encourage them to lend this money to businesses. But in fact, the negative deposit rate especially discourages foreign cash to settle within the monetary union. Such an influx would effectively push up the euro, precisely what Mario Draghi seeks to avoid.

The weak euro helps companies

Since March 2014, the euro, now at 1,0850 dollar has lost roughly 20% against the greenback. Although in theory it is not within its mandate, the weak euro is indeed one of the unofficial goals of the institute in Frankfurt. It forces up the price of imported goods and thus, revives inflation. At least in theory. Unfortunately for the ECB, these inflationary effects are yet offset by the sharp decline in oil prices.

Another effect is that the weak euro favours the competitiveness of European exporters who sell their products cheaper on international markets, and therefore, the activity picks up. On this point, economists believe that the strategy of the ECB is a success.


Falling interest rates benefit the states and households

This is probably the greatest achievement of the institution chaired by Draghi. In 2012, rates on 10 years’ government bonds in Greece, Portugal or Spain took off up to 37%, 15% and 7%. We all remember then Draghi saying that he will do “whatever it takes to save the euro,” by creating a first and a second public debt buyback program. The head of the Central bank has completely extinguished the debt crisis.

Spanish or Portuguese government borrowing rates have even now fallen below the 3% mark. Thanks to this, these countries were able to stabilize their public finances and resume growth.

The fight against inflation low is a failure

However, the ECB has so far failed to achieve its primary goal: to stabilize inflation around 2%. In October, inflation stood at + 0.1%. Excluding the most volatile prices such as energy, it nevertheless was + 1.1%.


Of course, the ECB is not responsible for some causes of low inflation. Weakness of wages, high unemployment rate (10.7% in the euro area), competition from low cost countries… Monetary policy might have become ineffective against low inflation. Let’s hope that this low inflation doesn’t transform into deflation, thereby engaging in a negative spiral, which will finally block the entire economy.

Unemployment Eurozone

The Eurozone growth remains anaemic

Apart from inflation, the ECB action also aims to reinvigorate European growth. But again, results are not awesome. The monetary union’s GDP is slowing: it grew by only 0.3% in the third quarter, against 0.4% in the second and 0.5% in the first … On its own, the ECB seems unable to restore growth, States are also expected to do their share of work.


If European activity is slipping, this is also partially due to external factors such as the slowdown in emerging countries. But there are also internal factors, like the lack of ambitious reforms to boost activity, or low investment made by countries which have the power to do more, like Germany… Meanwhile, the liquidity injected by the ECB continues to fuel the rise of financial markets. At the risk of creating, ultimately, potentially devastating bubbles …

End of the Year Rallies – Equities Indexes & The Bund in review

13th November 2015 by | Trader's Desk | No Comments

Now is the time to make previsions for the end of the year and I will here detail my

views on the major Equities Indexes and on the Bund.

The ECB’s President, Mr Mario Draghi, has already paved the way for a bullish end of

the year with his latest statements about a possible QE extension. The volatility has

also dipped sharply since the August decline, mainly due to China’s woes. Finally, the

bigger timeframes still look incredibly bullish and I won’t be the one to fight such

trends, whether in Equities or Bund.

ES long term

The S&P500 December 2015 Future has retraced recently from 2110 to a very

interesting level of 2065-2070 and I am long from here, and will eventually add to the

position at around 2050. My fist target will be 2090 and then a new all-time high at

around 2125.

ES 240

I assume that traders will keep on supporting the DAX on dips and suspect that they

will see the 10.700 – 10.900 range as an ideal region to add to long positions. The DAX

index could even drop lower, to 10.550-10.600 without altering the trend. I am

personally building a long position from the 10.750 area, and will add at 10.650 if we

reach that level.


In the longer run and with better data coming out of the U.S. such as wage growth

reaching a 6 year high by increasing 2.5% year on year, the likelihood of stock markets

globally remaining upbeat rises. If it is the case that the market reaches and breaks the

top of the descending trendline at 11.150, there will not be any major technical

resistance level until we reach first the July high of around 11.800, and probably later

print a new all-time high above 12.500.

Dax long term

A push higher at this time of the year is also consistent with seasonality as traders get

in line to take advantage of the Christmas rally effect. The biggest risk we can see

ahead of us is a Fed rate hike. The first rate hike tends to cause a pullback in equity

markets and the market also tends to be shaky on fear of what that first rate hike may

bring. But, in the end, a rate hike is the sign that the economy is recovering well and

shouldn’t be seen as the end of the world, especially if the pace of rate hikes remains

very slow in the next few years, as I think it will be.

Finally, regarding the Bund, the 10 years Yield has reached yesterday an interesting

level at 0.7% and I have shorted that trendline you can see in the graph (so long Bund

at around 155.25).

10 year German Yield screenshot
















I am expecting the yield to go back towards the 0% level, due to QE extension (and

Bund December 2015 Future contract to retest 159 and 160 my next targets).

Bund long term

Happy Trading!

Perspective on China: Growth, only child, environment, the Chinese five-year plan

30th October 2015 by | Trader's Desk | No Comments

The Chinese Communist Party (CCP) direction meets this week in camera to set the broad political and economic guidelines for the next five years, while the country is engaged in a laborious rebalance of its growth model.

These are the main questions at the heart of discussions on the five-year plan covering the period 2016-2020.

What growth target?

Yuan Growth
The second world economy is experiencing a significant slowdown in growth, which is expected to fall this year to the lowest in a quarter century. The regime had set a goal for 2015 of about 7%.
“Beijing should significantly degrade its ambitions for 2020 – the leaders could agree on a flexible annual target by 6.5%, with the possibility of revising down this figure, as long as the job market stays around current levels”, according to Nomura bank’s analysts.
President Xi Jinping recently assured that “a growth rate of around 7% would be sufficient to achieve the goal of doubling by 2020 China’s GDP compared to 2010”.
The new goal could however only be unveiled in March, after validation by the Chinese parliament.
The credibility of official statistics remains debated, and many experts predict a more pronounced economic slowdown.

What could be the “new normality”?

Beijing assumes “the new normality” of slower growth, which is the result of its efforts to rebalance its economic model in favour of domestic consumption and the service sector, while reorganizing the huge state sector.
These guidelines, endorsed the end of 2013, should be confirmed at the meeting.
The five-year plan should further increase the share of services in GDP, which already grew from 44% to over 51% between 2010 and 2015 and confirmed the goal of doubling household incomes between 2010 and 2020.

Towards made “by” China?

Chinese manufactured exports are struggling, because of a mixed international situation but also by increased competition. There is also high inflation on the cost of Chinese hand force.
In this context, Beijing openly calls for an upgrade of the Chinese industry to the electronic and new technologies.

What about financial reforms?

Liberalizing furthermore the financial sector reform is also highly expected, especially on the convertibility of the yuan, with the possibility of cancelling controls on capital movements in 2020. Finally, further opening of financial activities with foreign institutions and the private sector could be considered.

Cleaning up without coal?

China Pollution Tourism

Pollution of air is a sensitive subject for China’s opinion, and important decisions should be taken.
Another problem is about coal, highly polluting, which still represents about 70% of China’s energy mix, in the absence of other sources of energy in sufficient quantities, and despite a nuclear fleet in full extension.
China has also committed to a peak in emissions in 2030.

End of one-child policy?

Already eased two years ago, official experts have recently called to urgently allow all couples to have two children in order to slow down the aging population and the alarming gender imbalance.
Since late 2013, the Chinese can have two children if one parent is an only child.

UK and China recently engaged

Uk and China agreeing
President Xi visited the UK a few weeks ago and agreed up to £40 billion deals. These deals will create around 30.000 jobs in the country. UK and China commit to building a global comprehensive strategic partnership for the 21st Century. The two sides recognise the global significance and strategic importance of stronger UK-China relations in promoting global peace, stability and prosperity. Both sides reiterate that they are determined to support each other’s prosperity and development and to work together for the benefit of global peace, security and development.


Live from trader’s desk $USDX – 08.10.15

8th October 2015 by | Trader's Desk | No Comments

I stay fundamentally long on the dollar index. I just bought this ascending trendline, and that could potentially be a good spot to anticipate a break-out of the triangle.

Raphael Daune.



Equities markets : which events could fuel a new real bullish dynamic?

1st October 2015 by | News | No Comments

Equities markets have been particularly volatile during the third quarter of 2015. Let’s think about the

different scenarios that could help investors regain confidence.

It will not have escaped anyone that the economic environment has deteriorated in the third quarter of

2015. Despite the temporary resolution of the “Greek case”, China has given many signs of slowdown in

industrial activity, leading to doubts about future growth of the world economy. These doubts have

been transmitted to the US Fed, which did not dare to climb its key rates on September 17 as it was

previously planned.

Several major European Equities indices are back to a level close to that which was theirs early in the

year, and the S&P500 is slightly in negative territory.


euro stoxx

In this context, two views are opposed. For some, the Equities markets are entering a downward cycle.

For others, this pessimism is excessive as central banks still have a few levers available to reassure

investors if it becomes necessary.

S&P500 2015

An American QE4?

There is still an existing possibility that the FED doesn’t hike its rate in 2015, and even establish a new

program of monetary easing (QE4) after the previous three already conducted since 2008 in the United

States. The introduction of each of these plans has led to a major bullish cycle for Equities markets.

SP500 QE

The option is still considered very unlikely though, while a majority of FOMC members at the last

meeting were still anticipating an increase this year.

Other solutions could be planned however with much better odds.

A bounce in Commodities?

A global rebound in Commodities would give a breath of fresh air to many emerging countries whose

economies are closely linked to this sector. Equities markets would definitely benefit from a rebound in

this business area. A rebound in energy prices would impact positively inflation and also allow the Fed to

provide more visibility on the pace of rate hikes.

Additional measures from the ECB

One last surprise could come from the last decisions of the European Central Bank. Mario Draghi has

made a habit of surprising the markets since his arrival, thus, the ECB might surprise by announcing new

easing measures or increase and/or extend significantly the current ones.


It is apparently too early to bet on this kind of reinforcement of the latest measures and a period of

observation of the evolving of the economic conditions is required. But Equities markets could receive

some good news at the end of the fourth quarter and this is something we definitely have to monitor in

the next ECB statements.

On a personal point of view, I remain bullish on Equities markets, as I don’t see a systemic risk at the

moment that could trigger a deeper correction from the current levels. The earnings season is starting

soon and it will probably a clearer view on the shape of the economy. Last but not least, investors have

been talking (with fear) about that US rate hike since quite two years now, so this might not come as a

big surprise whether it happens next month or within three months. A rate hike should also been seen

as a good sign that the economy is on its way to recovery, not as a huge catastrophe.

Finally, a real crash will also most likely to happen when nobody expects it. Now, so many people are

expecting a bear market that I anticipate a short squeeze before any real bear Equities markets

materialize. If the S&P500 can hold the 1800-1850 support and reverse until at least 2010, it will trigger

many stops from short traders who might even reverse their positions.

S&P500 prediction