The holiday-shortened week has begun. Some causes of consternation have eased. Oil prices are firmer after the pre-weekend recovery. The Russian rouble, where the focus has been greater than the exposure, has continued to recover following signs that China may be willing to offer it more assistance. Its up 5.4% to bring its two-day recovery to 9%. Some pressure on the rouble had been spurred by Rosneft trying to secure $7 bln for a debt repayment. After it made the payment, the selling pressure on the share price and the rouble eased considerably.
China and Russia had established a CNY150 bln (~$24 bln), three-year swap line a couple months ago. There has been some suggestion that China could expand the swap line. China has swap lines with at least 28 central banks, of which only one, Argentina, has drawn on it. It was used not to help settle trade with China but to defend the peso.
Overnight rates in Russia have eased but remain elevated. Tax payments due this week may also be absorbing liquidity. The central bank injected short-term liquidity, but a key bottleneck has emerged: some banks doe not have sufficient collateral to borrow more. The yield on Russia 10-year benchmark rouble bond is off 41 bp to drip below 13%. It peaked last week near 15.9%.
The European news stream is quiet. The euro recorded new two year lows before the weekend, and is consolidating those losses today. The small bounce that saw it move toward $1.2275 appears to have exhausted the correction, though the lack of participation could make for erratic price action. European stocks and bonds are firmer. The Dow Jones Stoxx 600 is up about 0.7%, by the energy sector.
It appears that a growing consensus expects the ECB to announce a wider asset purchases plan next month that will include sovereign bonds. As the modalities are being worked out, but there seems to be an over-arching goal driving the negotiations. Construct a program that will have the widest possible support. That involves the size of the program and the instruments to be bought. It also involves keeping risk to the ECB itself to a minimum. That could be having the national central banks absorb some of the credit risk, as is the case with the covered bond purchases.
