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Trader thoughts - the long and short of it

The ECB announced a plan to wind down QE asset purchases after the current €30 billion/month program expires in September, as widely expected by the markets.

ECB Flag
Source: Bloomberg

Euro plunges even as ECB unveils plan to taper QE: The ECB announced a plan to wind down QE asset purchases after the current €30 billion/month program expires in September, as widely expected by the markets. The central bank committed to a reduced €15 billion/month effort through the fourth quarter before stopping purchases altogether. However, the move sounded more like an admission of defeat than a declaration of victory. ECB President Mario Draghi said follow-on rate hikes will not come at least until the second half of 2019 and stressed that the economy still needs a significant amount of stimulus. The door for still more stimulus was also left conspicuously open. That made the decision to end the current QE effort seem like an admission that it didn’t deliver what policymakers intended. Not surprisingly, the euro plunged against all of its major counterparts.

Wall Street enjoy little of Europe’s enthusiasm: The contrast between the US and European equity benchmarks this past session was extraordinary. Benchmarks on the East of the Atlantic like the DAX 30, CAC 40 and FTSE MIB rallied on news the ECB’s path of stimulus withdrawal would be more reserved than speculative markets had accounted for. There was some spillover of the regional enthusiasm that update would inspire as was seen from the 0.8 percent advance for the UK’s FTSE 100. Yet, the knock-on support that could have earned US shares was too remote for investors State-side to take seriously. The S&P 500 and Dow carved out restrictive sessions with no meaningful progress to speak of – though this could be argued a benefit given Wednesday’s slide raised the risk of a more meaningful turn. With the Fed’s upgraded tempo for tightening policy moving forward so fresh in the market’s mind, there is too much local risk to find benefit in thin optimism in international markets. It is worth noting that the S&P 500’s activity level measured by the 5-day (1 trading week) average true range is the lowest since January 2nd – meaning these markets are as reserved as our previous holiday trading period. For a bright spot, the Nasdaq continues to reflect a speculative reach for tech underlying the growing sense of skepticism with the index putting in for yet another record high.

How much run for gold after ECB, oil on US inventory slip?: The Dow Jones Commodity Index slid this past session with a technical head-and-shoulders pattern present for the attuned speculator. It is interesting therefore that two of the speculative favorite commodities Thursday actually ended in the green. Gold broke picked up from its smallest 20-day (equivalent of 1 trading month) range in years owing to a technical break formed out of a wedge that essentially ran out of room. This break of necessity was helped along by the ECB’s more dovish pacing which favors alternatives to fiat as it would the Dollar, yet it will be difficult to charge a steady rally on this theme. US oil’s advance was equally ‘technical’ in nature. WTI climbed a fourth session as it closes in on the 50-day moving average at $68. That this was perhaps furthered by a drop in US inventories while the previous week US output hit a record high and OPEC is expected to increase output amid President Trump demands is equally telling about how promising this advance looks.

Dollar trying hard to keep the attention on itself: There was a noteworthy jump in US data this past session, but was that the source of the Greenback’s remarkable strength through the session? May retail sales rose twice the forecast with a 0.8 percent month of growth. Also, adding onto the monetary policy interest from the day before,  import inflation accelerated to a 4.3 percent pace. Yet, these two data series have a poor history of motivating FX reaction. More likely, the Dollar’s leverage was the side effect of its most liquid counterpart’s slide. The euro’s dive on ECB dovishness certainly earned EUR/USD the biggest decline since the sympathetic Brexit decline, but the strength registered across all its major pairings. Practical capital flows suggest that when capital is diverted from the second most liquid currency, it predominately heads to the most liquid. However, there is also the fundamental implications of the ECB’s dovishness further buoying enthusiasm on the Fed’s upgrade to a four-hike 2018. Will this trend extend through the end of the week? With trade war and political scandal headlines starting to trickle back in as well as the University of Michigan consumer confidence survey on tap, we may transition from passive advance to active fundamental drive. 

Can the BoJ keep the policy ball rolling after ECB and Fed: Both the Federal Reserve and European Central Bank have delivered remarkable monetary policy updates this week, sending a jolt of volatility through their respective currencies and capital markets. The Bank of Japan is a dominant monetary policy authority in its own right, and it is scheduled to announce its own update Friday morning. However, unlike its US and EU counterparts, the Japanese bank is very unlikely to deliver any meaningful changes to either its current policy settings or its outlook. Japan is far from reaching a reliable pace of positive inflation – a decades-long affliction. That said, it would be a mistake to presume the BoJ can hold this course indefinitely. The group has found itself a distorting force in the Japanese Government Bond market and building up to a disruptive position for more mainstream capital markets through other purchases. Furthermore, the effectiveness of their policies have diminished substantially some time ago. Eventually, it will change course; and as the most dovish major central bank, that shift will be important on a global basis. The question is whether they are forced to change before they are truly ready from an economic perspective. 

S&P/ASX 200 may struggle to recover amid US/China trade war jitters: Australia’s equities benchmark fell for second day on Thursday. The overweight financials sector led the way downward, shedding 0.55 percent. Commonwealth Bank shares sank to the lowest level in almost five years. A disappointing local jobs report and Chinese data pointing to softening economic activity in Australia’s top export market compounded downward pressure. SPI futures are pointing higher ahead of the opening bell in Sydney, hinting that a cautiously positive lead from Wall Street might carry through in to the week’s final session. Trade war jitters might derail momentum however as China prepares to unveil countermeasures aimed at responding to new US tariffs, stoking concerns about a deepening spat between the world’s top-two economies that disrupts supply chains vital to Australian business. 

AUD/USDAUD/USD to resume 2018 down trend after support break: The Australian Dollar looks vulnerable to deeper losses against its US counterpart after prices sank through counter-trend support guiding the upswing from lows set in early May. That rise now looks confirmed as a correction within the context of a longer-term decline launched in late January. Sellers are now poised to challenge the May 9 low at 0.7413, with a break below that on a daily closing basis opening the door for a test of the May 2017 bottom at 0.7329. Immediate resistance is in the 0.7585-0.7606 area. The Aussie fell alongside local bond yields after a hawkish FOMC rate decision reduced scope for near-term RBA tightening as knock-on effects from the US central bank’s actions bid up borrowing costs globally, doing some of the heavy lifting on behalf of Governor Philip Lowe and company.

Market Data:

SPI futures moved -6.9 or -0.11% to 6016.64.

AUD/USD moved -0.0009 or -0.12% to 0.7469.

On Wall Street: Dow Jones -0.1%, S&P 500 0.25%, Nasdaq 0.85%.

In New York: BHP -0.65%, Rio -0.39%.

In Europe: Stoxx 50 1.37%, FTSE 100 0.81%, CAC 40 1.39%, DAX 30 1.68%.

Spot Gold moved -0.11% to US$1300.77 an ounce.

Brent Crude moved -1.03% to US$75.95 a barrel.

US Crude Oil moved 0.59% to US$67.03 a barrel.

Iron Ore moved -0.21% to CNY471.5 a tonne.

LME Aluminum moved -1.17% to US$2275 a tonne.

LME Copper moved 0.48% to US$7257 a tonne.

10-Year Bond Yield: US 2.94%, Germany 0.43%, Australia 2.72%.


Written by: Ilya Spivak, Currency Strategist and John Kicklighter, Chief Strategist with DailyFX

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