The Neverending Story…
Today's news headlines:
- ‘Brexit showdown looms at Labour conference’. As the prospect of a general election becomes a more realistic possibility, the Labour Party is scrambling to establish a palatable leadership hierarchy and define a strategy. (Financial Times)
- ‘Draghi delves into policy toolbox to bolster growth’. Yesterday the ECB launched a well-rounded monetary policy package, including an open-end asset purchase program. At the same time, he delivered more fresh remonstration to EU member countries: ‘If fiscal policy had been in place, or would be put in place, the side-effects of our monetary policy would be much less, the action of our decisions today would be much faster and therefore the need to keep in place some of these measures would be much less’. (Financial Times)
- ‘US junk bond inflows signal investor optimism’. Fiscal prudence is taking a breather as markets pile into risky US bonds, signalling that end-of-economic-cycle fears are abating. The fresh release of monetary stimulus into the global economy is prolonging and extending the asset rally, which some fear is an asset bubble in the making. (Financial Times)
Shiny new facade
Much like a star-studded boxing match, yesterday’s European Central Bank (ECB) meeting didn’t disappoint for action. The unveiled stimulus package was a mix of what was expected and surprise. Rather than the 45bn per month of stimulus for 12 months that some forecasters had predicted, Mario Draghi announced a smaller amount with a 20bn per month package but with no firm time frame, a so-called open-ended QE facility. It’s an impressive package, and it was issued with a not-so-subtle message to EU member countries; they need to help the ECB. Besides supporting the EU economy, this dose of monetary easing is likely to extend the asset rally which seems to have stalled over the past several days.
For the first time since the tit for tat began, the US and China have played nice for longer than a day. This has resulted in a new glint of market confidence; starting cautiously but progressing in more confident tones this morning. If the President can contain his Twitter compulsions for a while longer, it could go a long wait to establish the credibility to get a deal done with his Chinese counterpart.
It would be foolish to discount the impact psychology has on markets—like the animal spirits concept coined by John Maynard Keynes. It’s important to recognise the lack of fundamental rationale underpinning this change of heart. Yesterday, we argued that ECB stimulus is not a cure to declining EU economic prospects, it’s a tourniquet, which will nonetheless expand the asset price game for some time to come. Likewise, a resolution of the US-China trade dispute won’t return the global economy to the faster growth footing, but it will dispel a good deal of the pervading uncertainty. The problem with this is, of course, it is not the end of the story. There is a US election looming which may very well result in another four-year dose of foreign policy Trump-style and fresh conflict. And while more developed nations’ governments warm to the notion of fiscal policy support, there is little consensus on policy. Much foundational work needs to be done before the castle in the sky's revealed to be more brick, and less hot air.
Bottom line: If the US and China continue towards a deal, this risk asset rally could continue for some time. The Dollar is sitting on the back foot as risk-taking becomes more prominent in currency flows, lifting emerging markets and commodity currencies. Stay tuned.
After several days of tense calm, the ECB press conference delivered some fresh action. The Dollar declined to the trade-weighted 50-day moving average as trade hopes continued to swell. Sterling is one of the beneficiaries of Dollar depreciation and continues to make slow, steady progress towards the trade-weighted 100-day moving average and top of the two-month range.
More sideways trading on this pair at the 100-day moving average. Despite some whipsaw action around the ECB press conference, the EUR is making some slow, steady gains, just like Sterling, so on net, little movement for the pair. On the data front, it’s sparse until the ZEW Economic Sentiment release next Tuesday, so little action is expected heading into the week’s close.
Much like GBP/USD, this pair rose as a result of yesterday’s ECB action. The US-China trade theme is a key contributor to USD weakness, so as more signs of détente appear, we would anticipate this to extend higher to the 50-day moving average and beyond. Some US consumer data is out later today, which is important since even consumer confidence has been in question recently.
All content is written by the Global Reach Trading Desk. The opinions expressed are not the view of Global Reach Group and are not intended as investment advice.