Europe declines a fiscal waltz with Draghi | Daily Market Commentary with Jeffrey Halley
Despite opposition from of his Northern European board members, ECB President Mario Draghi unleashed a full package of easing measures last night. Perhaps most importantly, he called on Europe’s governments to get in time and seriously look at fiscal stimulus, implying that monetary policy alone was reaching its limits. With only one more meeting left to oversee before he steps down, Mr Draghi feels freer to speak his mind, it seems and long may it continue.
It included a cut to minus 0.50% to the depo rate and a resumption of quantitative easing at EUR 20 billion a month until the ECB hits its European inflation target of 2.0%. The irony is probably not lost on many wizened traders, that that target rate has not been achieved for over ten years. How they’re going to manage it as the global economy slows had me scratching my head.
Europe’s banks would have been crying in their drinks last night as well, as European bond yields fell, making a yield curve fuelled recovery in profitability but a distant memory. They are right to feel aggrieved, Europe has failed to clean up the banking sector and more then a few of them were probably looking up the term -zombie bank- on Wikipedia last night. When the Italian’s can raise 10-year money at 0.75%, you know there is something seriously wrong in the world.
If this all sounds naggingly familiar, fear not, because it is. You were probably thinking of Japan, and although some circumstances are the difference, more than a few are the same. Deflation, check, zombie banks, check, stable employment, check, a stubbornly strong currency check, quantitative easing check, fiscal stimulus for decades with no discernable result, not check yet. We could also throw in a falling birthrate and ageing population as well, double-check.
Japan’s fate is probably being Mr Draghi’s pointed comments aimed at the Northern European fiscal hawks. 30-plus years of deflation and no end in sight with a demographic time bomb that gets more significant every year. Japan never quite got its act together to move the fiscal and monetary stimulus choreography in time and continues to pay the price. Berlin’s intransigent fiscal gnomes should be paying attention, however. If only Mr Draghi wasn’t Italian.
Easings will be on the minds of the Bank of Japan and the Federal Reserve next week with both expected to move rates lower and in Japan’s case, possibly even more QE. It will be interesting to see what the Bank of Japan actually has left to buy, but more importantly will be the rate outlooks from both, especially the Fed. A march into more dovish territory could see the dollar finally shrink from being the Hulk of the financial world. Emerging markets will be watching closely, an official Federal Reserve easing cycle will likely trigger a rush of tit-for-tat cuts to ease overvaluation fears for their currencies.
Asia has had a modest trading session thus far with market heavyweights China, Taiwan and South Korea all on holiday today. The prospect of more central bank easings next week. Also, a tentative thawing in U.S.- China relationships is gently supporting Asian markets today. I expect that the QE sugar rush along with more goodies expected next week will maintain the positive tone to regional markets and into Europe.
Wall Street had a modestly positive session with all the S&P 500 and Nasdaq higher by 0.30% and the Dow Jones by 0.20%. Japan has been the standout performer with the Nikkei rising 0.90% on the prospect of more easing by the BoJ next week. The ASX 200 is flat while the Straits Times Index is 0.30% higher and the Hang Seng is 0.22% higher.
I do note that with many stock indices at or near record highs, there is a noticeable lack of euphoria amongst market participants. The best I could describe sentiment today is nervously bullish.
The Euro plunged 100 points against the dollar to 1.0930 following the ECB announcement. Within the hour, it had made all of those losses bank and marched on to 1.1080, closing 0.50% higher at 1.1065. The strength and pace of the rebound suggest two things to me. The market was seriously short Euros into the ECB. Secondly, we may have passed peak negative Euro and that President Trump can rest easy on his social media account.
Most of the reasons for selling the Euro seem to have been baked into the price for now. The Yen also appreciated during Japan’s lost decades, and if Europe is heading down the same box canyon, the Euro may have the same fate. A Federal Reserve official flip to an easing cycle next week could mean last nights low in Euro might be the low for quite some time.
Oil fell overnight after the OPEC+ monitoring committee meeting yielded no new insight into new cuts in production. That actually isn’t the job of the monitoring committee anyways, but a nervous market needed no excuse to reduce longs further. Brent fell 0.80% to $60.20 a barrel, and WTI fell 1.25% to $55.00 a barrel.
Both contracts have eased a further 0.20% during Asia in light trading severely diminished by regional holidays. Asia will be content for a quiet end to a busy week as we await more clarity on trade and central bank policy next week.
Gold spiked by twenty dollars to $1520.00 an ounce over the ECB announcement before falling rapidly back to close at $1500.00 an ounce. Kneejerk reactions aside, gold continues to impress with its resilience around these levels.
Gold continues to imply there is a dark side to the recent equity rallies globally and that there is “something wrong in Denmark.” Impending easings next week by the Federal Reserve and Bank of Japan should only aid its cause.
Gold is unchanged in holiday-thinned trading with technical resistance clearly set at $1520.00, the overnight high and robust technical support continuing at $1480.00.