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Trader thoughts - the long and short of it

Perhaps the focus started surprisingly with the Bank of Japan providing narrative in Asia trade yesterday. It was regarding a discussion taking place amid the bank about how to handle their exit strategy. This caused some gyrations in the Japanese bond market and one suspects we will be talking about an end to the BoJ’s yield curve control more actively in the months ahead.

Market data
Source: Bloomberg

In terms of causing gyrations, the same can’t be said for the European Central Bank. While the wash-up we have seen is the EUR fall against all G10 currencies (well up until the UK exit polls), notable the NZD, perhaps the dovish development was cutting its inflation forecasts for 2018, 30 basis points (bp) to 1.3%. Most of the attention was placed on the removal of an explicit easing bias from the statement, but the lack of any real moves in European government bonds or interest rate markets suggest the market was clearly not debating any further monetary easing in any shape. I think it is still important to note that Mario Draghi detailed that only two members of the Governing Council had been pushing for a normalisation of policy and that he felt the ECB could still cut rates if needed.

If anything, I am surprised there was not more of a sell-off in EUR/USD and we only really saw the US Treasury/German Bund 10-year spread widen a few basis points to 193 bp. The market will be debating whether this statement really is indicative of the central bank preparing itself to announce a tapering schedule of its quantitative easing program in the September meeting. There is a view here that the bank cut the rate of monthly bond purchases in January, from €60 billion a month to say €40 billion. That is up for debate.

US markets have provided a flat lead for Asia once again and we see the ASX 200 opening at 5677, with SPI future up three points. It’s interesting to see funds flowing into US banks (the S&P 500 financial sector closed up 1.1%). I like the XLF ETF (US financial sector ETF) higher as a trade here. I would be focusing on the US fixed income curve as a driver, as I see some elevated risk the curve steepens a touch in the short-term as we enter next week’s FOMC meeting.

There has been a sizeable focus on former FBI Director Comey’s testimony, but again, for those looking for a smoking gun that detailed Trump obstructed justice, they didn’t hear it in the testimony. As expected, it was a market moving event. Perhaps the bigger story for markets was the headlines that House Speaker Paul Ryan has the votes to pass a bill to repeal parts of Dodd-Frank and impose sizeable changes to the US financial regulatory system.

Materials will be interesting here, as BHP’s American Depository Receipt closed up 1.1% and Vale’s US-listing 2.1%, yet we saw spot iron ore close -1.1%, gold -0.7%, US crude -0.6% and iron ore futures -1.1%. Copper seems to be the outlier with a solid gain of 2.5%.

So to complete the tri-factor of event risks (ECB meeting, Comey testimony and UK election), it’s now down to the UK election to see that despite the talk and media focus, it can shake some life into markets. GBP/USD traded a range of $1.2978 to $1.2908 overnight, but the market has come alive with the smell of volatility here as the first exit polls roll in with the Conservative party getting 314 seats in the exit polls, 12 short of the required 326 seats.

Former UK finance minster George Osborne has labelled this poll a ‘completely catastrophic’ and we are one-step closer to Theresa May losing an unlosable election and perhaps stepping down as her campaign has been terrible. GBP/USD has been hit 1.5%, but we wait to see if the exit polls are indeed accurate as they were in 2015. All eyes on the key marginal swing seats like Chester and Ealing, while bellwether seats include Nuneaton, Thurrock and Dartford.

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