“Markets stop panicking when policy makers start panicking” – BofA strategist Michael Hartnett
All eyes will be on Mario Draghi on Thursday as expectations for something big from the former Goldmanite have grown over the past two weeks. More specifically, some now think the odds of QE expansion have increased considerably in light of recent events. Here’s what we said on Wednesday:
Why would the ECB expand QE you ask? Well, first because if we’re going by inflation, PSPP really hasn’t worked as evidenced by collapsing expectations.
And second because the only thing that can offset the synthetic inverse QE that China and/or the rest of the EMs embarked on, is more quite tangible QE conducted elsewhere, ideally at the ECB (which is currently 6 months into its first QE episode), or Japan (although the ceiling to debt monetization there may have been already hit with the BOJ already monetizing more than 100% of all gross issuance) but not the Fed, whose rate hike intentions are what started this entire global reserve liquidation fiasco in the first place.
So in short, the deflationary bogeyman still lurks, as does more than a $1 trillion in expected EM FX reserve draw downs spearheaded by China with Saudi Arabia right behind Beijing. That will serve to remove liquidity from markets and put upward pressure on core rates, effectively working at cross purposes with DM central bank easing.
And then there’s the outright turmoil in China’s financial markets, the confusion wrought by the yuan deval, heightened volatility across the globe and chaos in emerging markets from LatAm to AsiaPac. Put simply, Draghi’s famous jawboning might not do the trick this time especially with everyone casting a wary eye towards the Fed.
Bottom line: nothing calms the market like a panicked central banker.
On EUR/USD via Bloomberg:
EUR/USD is little changed at 1.1225 within tight range today as traders wait for ECB rate decision at 1:45pm CEST and press conference afterwards.
Traders currently in wait-and-see, headline-trading mode, and they aren’t pre-committing to cash positions
All eyes on whether Draghi will talk down the euro and/or signal a possible expansion of ECB’s QE if needed
Dovish stance will see EUR testing 21-DMA support at 1.1194 ** Pair has been trading above that lvl since Aug. 10
Next support at 1.1102/07 21-DMA/Aug. 20 low
Bids seen at 1.1185/90 and 1.1150, a trader in London says
Should Draghi disappoint EUR bears, pair may test offers at 1.1275/80: trader
Daily trendline resistance since Aug. 27 at 1.1308 and 1.1364 high on that day may cap reaction initially
Any knee-jerk response might be short lived as all important NFP data expected tmrw
Probability of a Sept. Fed liftoff now at 32%
Below, find some color on today’s pivotal ECB decision from everyone you might care to hear from.
* * *
From Bloomberg’s Richard Breslow:
With China closed, global equities are having a calm up day which perhaps gives some insight into the broader view of risk without Shanghai panic, Bloomberg’s Richard Breslow writes. By and large it has been a quiet day as we await the ECB and nonfarm payrolls. No one is looking for the ECB to move on rates. The market is looking for the staff projections to be cautious with any outlook change and the heavy lifting to be done by Draghi at the press conference with a ready-to-act statement on unwarranted tightening. Any sign of cautiousness could be a mistake as global markets need bold actions. The economy needs it, the currency needs it.
The five year/five year inflation gauge that Draghi has said the ECB watches very carefully remains at very depressed levels. There is no sign from the swaps market that inflation is expected to hit target as far as the eye can see. Say what you will about the market being wrong, but the market has had a better track record on predictions than many central bankers. Germany is not the euro zone. Isn’t that the message we are meant to have learned throughout the financial crisis? I would certainly ask Draghi if this swap still figures highly in their forecasts
At the other end of the spectrum, bund yields are staying elevated. (Yikes, I can’t believe I am calling 80bps elevated.) Much has been written about why bund yields are higher despite the equity turmoil, but the reality remains. From a technical level 80 bps has been interesting. The ECB wouldn’t want yields to break higher. And the last thing the rest of Europe needs is higher yields. This week three euro- zone countries will have sold bonds at yields that have been moving higher since their last go rounds
The euro remains in the middle of its YTD range with the USD. As long as EUR/USD remains above 1.1100-1.1150, let alone its 55-day moving average, technicians view it as a buy. The euro zone, again Germany aside, can’t afford a strengthening currency. This includes the rest of the core as well as the peripherals. It’s not currency war to get the EUR down, it’s economics if they want to strengthen the economy. EUR/GBP poking its head above the 200-DMA won’t have gone unnoticed
The IMF which has continued its serial downgrading of global growth forecasts has said so again. After cutting its growth forecasts in July, IMF Managing Director Lagarde said earlier this week that, “the global expansion outlook is worse than the lender anticipated less than two months ago,” with advanced and Asian economies growing more slowly than expected. Ahead of this week’s G-20 meeting the IMF argues that “Advanced economies should maintain supportive policies. In most advanced economies substantial output gaps and below-target inflation suggest that the monetary stance must stay accommodative”
Global equity markets have been in a panic. Volatility has spiked. A strongly dovish ECB will help. If volatility is the supposed enemy of a central banker then here you go. The PMIs have not been spectacular. Even the Spanish economic miracle took a breather this week with employment data described as showing a deceleration in the economy by Miguel Cardoso, chief Spain economist at Banco Bilbao Vizcaya Argentaria SA.
This really isn’t the time for the ECB to go small. It is an opportunity for them to exert some leadership
Leave A Comment