Over-excitement always causes disappointment

A lesson in over-positioning was delivered overnight as the short positioning in the EUR and the long positioning in European bond and equity markets were given a rather measured European Central Bank (ECB) policy change.

ECB
Source: Bloomberg

I have been fully aware that last night’s ECB meeting would be the biggest ‘disappointment’ event of the week. What the market ‘wanted’ versus what the market was ‘going to get’ were two distinctly different events.

The end result from the ECB meeting was that the deposit rate was cut by 10 basis points to 30bps versus the market pricing of around -41 bps.

And the asset purchase program has been extended to March 2017 (some had called for it to be open-ended) but the pace of monthly purchasing was maintained at €60 billion; the market had priced in a €75 billion a month pace.

EUR/USD was at 1.0525 at the low yesterday. If the non-farm payrolls (NFP) tonight is weak, a plus $1.10 will be locked in come the weekend. That’s over five cents in 48 hours in the biggest volume pair on planet – staggering.

Things of note

Staggering moves were clearly seen in European fixed income (German two-year bund +14bp, ten-year +19bp), with huge knock-on effects on Swiss Govies too as traders sense there won’t be a counter response. Even the US ten-year treasury moved +15bp, with the US curve steepening to 134bp despite a poor services ISM. The spread in the two years between the US treasures and German Bunds was smashed.

The other issue from overnight is the vote was not ‘unanimous’. It’s not hard to conclude were the ‘resistance’ came from – the Germans would have been rather displeased to see the measure the market was wanting to put into the European economy. It is also clear that Germany is going to have to be dragged kicking and screaming into ‘further stimulus measures’ and there is now a belief that Draghi has done his dash. Although there was slack for further moves into 2016, the premium in European equity markets in the short term will filter out fast.  

OPEC is now making all the ‘right’ noises of inaction.  Brent and WTI did rally overnight, however we see this move being down to the mass shorts in the trade simply relaxing before using the OPEC announcement as a reason to pile back in.

Iran is resisting calls to cut production having just come back into the output mix from sanctions being lifted this year. Russia, a non-OPEC member, was invited to the conference is also showing signs it’s unwilling to move on its output mandate and now squabbling has broken out between ‘action’ members. I mention this at the start of the week the hype around the last two OPEC meetings was exactly the same as this one – the conclusion is the status quo will be maintained.

Ahead of the Australian Open  

The European overpricing is going to spread globally. Nothing ‘risk’ based (equities) was spared last night and I don’t expect the ASX or any Asian indices to really miss out on the sell off today. We are calling the ASX down 73 points to 5154. BHP and Rio were savaged in London; BHP’s ADR has the Big Australian at $17.87 which has not happened since mid-2005. The banks are also unlikely to see any respite; CBA’s ADR is off 76 cents to $80.74.

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