UPOD

It's the oldest trick in the policymakers' manual: Under-promise, over-deliver.  In fairness, Super Mario never really under-promised; Wednesday's 50b per month leak certainly suggested a program that was larger than the prevailing consensus.  But by comfortably exceeding that figure just 24 hours later and laying out a roadmap for at least 18 months' of purchases, Mario Draghi once again demonstrated that he is not to be trifled with.

To be sure, the Germans got their wish and segregated the vast bulk of the buying from the ECB's balance sheet; Macro Man couldn't help but notice Draghi's mention that the Bundesbank were the beneficiaries of full risk sharing (had it been required) in the depths of the maelstrom in 2008.   Whether this was a subtle dig or a history lesson is unclear; perhaps it was a little of both.

Regardless, it was a fairly assured performance from the ECB President, and when Mr. Draghi is assured, he normally gets what he wants.  So it was yesterday; although the euro took a little while to make up its mind, by the end of the day the sellers poured in, the buyers backed off, and the SNB no doubt congratulated themselves on how little they managed to lose on their 175 billion of euro denominated assets (or B.)

Looking at a monthly chart, there appears to be quite a bit of fresh air below current levels in EUR/USD.


While nothing moves forever in a straight line, of course, it certainly doesn't feel as if euro weakness has gone tabloid, as the Dollar Going Down Forever was wont to do quite frequently over the last decade and a half.  EGDF might well become over-crowded, but that will likely require more time and lower prices.

As for equities, they were all swept up by the excitement on Thursday; one can easily imagine European equity managers chairing Signor Draghi out of the village square, as the SX5E reached a post-crisis high.  That having been said, liquidity can only carry you so far in the absence of any discernible demand; everything you need to know about European equities is probably summarized in the chart below of the IBEX and DAX; no promises for guessing which is which.


And fixed income?  Let's just say that when you can be long 10 year UST versus BTPs and pick up 30 bps of positive carry, you're supposed to do that until your (appendage of your choice) falls off, aren't you?  The ECB hasn't even bought bonds yet, and those BTPs are yielding roughly 10 bps above the all time low in Treasuries.

No wonder the SNB wanted no part of buying any more.....
Previous
Next Post »

27 comments

Click here for comments
Anonymous
admin
January 23, 2015 at 12:06 PM ×

Nice summary! Regarding fixed income, do you mean long UST yields versus BTP? That would imply sell TY and buy BTP futures?

Reply
avatar
CV
admin
January 23, 2015 at 12:33 PM ×

Re comments in the previous post, I should just rename my tag here to "LB fanboy", but I have to concede the short euro punt to MM here, well done "min ven." Of course, I also think that this is probably the last gasp before the lights are out on the Euro short trade, for now. Think an average EURUSD value over the next six months of say, 1.15!

Sovereign QE and cyclically improving growth does not equate to low yields and a weak currency in the Eurozone. It won't be that easy for Mr. Draghi. Indeed let us add the tally shall we.

- Low oil prices boosting real incomes
- Weak euro boosting earnings
- Sovereign QE
- Leading indicators turning up BEFORE the ECB got on board.

You put that into your little macro blender and suddenly the Eurozone is growing 2% this year all the while the ECB will unleashing euros into the system every single month. I can understand that you think the Eurozone is structurally doomed (I would even agree), but this ain't the time to throw your chips in on this theme I think.

The whole situation is a perfect mirror image of 2007/08 where global central banks hiked us into the stone age as oil soared. My base case is that we are now entering the silly season part of the cycle. My family members are already talking about their stock portfolios this year (true story!) and I think the postman and cab driver will start talking about his long IBEX futures very soon.

This isn't the end, but it might be the beginning of the beginning of the end ... or something like that.

Reply
avatar
Macro Man
admin
January 23, 2015 at 1:21 PM ×

Anon- no, the reverse. Buy USTs, sell BTPs. If CV's (IMHO, overly optimistic) economic outlook comes to pass, is anyone really going to want 10y Italy yielding less than the EZ economy?

Reply
avatar
abee crombie
admin
January 23, 2015 at 1:44 PM ×

Jefferies Zervos seems to have nailed it again with long Dollars and Dax for 2015.

I am a big fan of stock market models that place a large weighting on earnings growth. So far EZ equities havent seen much of any earnings growth over the past few years, hence the underperformance. I think to keep the rally going lots of emphasis will be placed on Q1 results and probably more on "H2". I am not as familiar with EZ earnings but for quite a few companies I watch they dont do quarterly just H1 & H2, though I am assuming all the big ones do quarterly. US forward earnings actually seemed to have topped out a little here http://imgur.com/RgWjZGJ

Reply
avatar
abee crombie
admin
January 23, 2015 at 2:07 PM ×

http://imgur.com/YFSJxkn

US earnings up 30% from 2007 and almost consistently upwards since 2010. EZ earnings at 60% of 2007 levels and peaked in mid 2011

Reply
avatar
Macro Man
admin
January 23, 2015 at 2:13 PM ×

Abee- concur. Not coincidentally, this is why Spooz are at all time highs and SX5e is just over 60% of all time highs

Reply
avatar
CV
admin
January 23, 2015 at 3:25 PM ×

Indeed MM and Abee ... Eurozone equities have an earnings problem, or specifically a nominal GDP problem. Private demand in the Eurozone is still significantly lower than it was before the crisis and that just makes it difficult for companies exposed to European demand to grow their topline.

Thank god, then, that QE mainly "works" through multiple expansion ... we hope. Now on Eurozone GDP, let me specify my assumptions. The trend in the eurozone, on a good day with an optimistic economist, is somewhere between 0.8-1.0% annualised. Right now, any reasonable bottom-up forecast will yield about 1.2% annualised (0.3% q/q in q4), and so you add a dollop of all the factors I talk about ... maybe not 2.0%, but 1.5 or 1.7 even?

Stranger things have happened, but it will all down to Germany as per usual. But if Germany has a little investment cycle here or France just manages to go from horrific to bad, it could happen.

Reply
avatar
checkmate
admin
January 23, 2015 at 3:59 PM ×

CV,
I'm thinking of this in terms of what's more likely,GDP surprises to the upside ,or surprises to the downside? Coming from the awful place they are I think I would rather be positioned for the former than the latter.

Reply
avatar
Anonymous
admin
January 23, 2015 at 3:59 PM ×

I wonder what Jan. CPI is going to look like...

State Street PriceStats Inflation Series United States

http://imgur.com/hGRsoTy

Reply
avatar
washedup
admin
January 23, 2015 at 4:38 PM ×

CV/MM/abee - whether they like it or not, the key to the eurozone revival is actually not in their hands, but China's - Eurozone lives and dies by the EM capex cycle. You can abstract the Eurozone as a closed economy plus the German export engine - so a weak Euro (but not so much lower crude) will help, PROVIDED aggregate demand in EM (mainly Brazil + China + derivatives) is robust and hooking up.

Other problem is, this puts Kuroda-san in a bit of a pickle, because his kamikaze yen weakening plot just got side-swiped (to quote MM's phrase) by EURJPY. This guy won't be allowed to jump off the building in peace without Draghi's fine italian crafted rope slowly dragging him back into the room through the shattered glass...

Reply
avatar
hipper
admin
January 23, 2015 at 4:42 PM ×

Well bought some EMB today. Let's see if some of those new, shiny freed up proceeds earning negative real yield back home actually get strayed toward EM markets. Keeping TLT for now also.

Reply
avatar
Nico G
admin
January 23, 2015 at 8:18 PM ×

Japan and Europe, the fight between the world's two worst demographies

or in other words, can their export brio compensate the stagnating population/domestic consumption

Reply
avatar
Anonymous
admin
January 23, 2015 at 11:02 PM ×

So USDJPY to the moon please?

Reply
avatar
CV
admin
January 24, 2015 at 11:48 AM ×

What a great thread for a geek like me!

@Washed: You are absolutely right. Before 2009 and following the super-stimulus administered by the PBOC as a result of the crisis, Germany enjoyed export growth rates of 30-40% y/y to China. Part of this of course was base effects as well, but the key point. Those growth rates are not coming back. But there is a twist in this tale, and it is important. The UK and the US have taken over as drivers of Eurozone exports since 2011. Indeed, the real(!) story here is the UK. The Eurozone now runs a larger bilateral nominal trade surplus with the UK than it does with US! Adjust for the relative sizes of the economies and that is pretty amazing! What does it mean for investors, well the Eurozone will be very sensitive to UK demand this year, but EURGBP will help here obviously. Incidentally, when the flows reverse, expect the EURGBP to go higher, fast!

@ Nico: Well I think you just hit the bulls eye there. But what happens when rapidly ageing economies, short on domestic demand and with external surpluses, have negative interest rates and starts running QE?! This will be/is the mother of all carry trades. It also indicates that export dependency coupled with the need for very loose monetary policy is essentially an externality to global financial markets. QE creates inflation alright, but in all the wrong places. Now, I am not about to exonerate Bernanke for his little Savings Glut proposition trying to hide the policy mistake at the Fed. But in a rapidly ageing world, it becomes relevant to, at least, consider that too much fiat money end up chasing too little yield.

Reply
avatar
theta
admin
January 24, 2015 at 9:24 PM ×

Here's Draghi (Dracarys) unleashing QE and the subsequent slaughter of shorties.
https://www.youtube.com/watch?x-yt-ts=1421914688&v=IU2bIzsJ8LE&feature=player_detailpage&x-yt-cl=84503534#t=208

Reply
avatar
Leftback
admin
January 25, 2015 at 12:39 PM ×

Right then.. a couple of gems from above:

CV said: "if Germany has a little investment cycle here or France just manages to go from horrific to bad, it could happen."

checkmate said..."CV, I'm thinking of this in terms of what's more likely,GDP surprises to the upside ,or surprises to the downside? "

Precisely.. I think these two gents have their finger on the (yes, the heart IS still beating) pulse of the EZ economy. It's just not as bad as punters think, especially those based in Oklahoma who like to pontificate about Yoorp. Now, if you'd like to see incipient short-term weakness, these blokes should look out the window!!!

MM, USTs v BTPs. Yes! But only as a pairs trade, eh? I can't read the consequences of a large scale turn-around in capital flows out of USD b/c I haven't seen a parabolic move like this except in a global credit crunch which is not where we are. I do think we can see US equities, bonds and USD all decline at once, which would be ugly.

My US window looks out at sad little towns full of shuttered businesses, populated by older long-term unemployed adults, high youth and minority unemployment, weak aggregate demand, debt overhang, currency headwinds for corporates and decelerating growth industries. This is reality. Ugly US data is now dead ahead.

Sell Bucky while you can.

Reply
avatar
Anonymous
admin
January 25, 2015 at 7:14 PM ×

Spain's new anti-austerity party, Podemos, has hailed the success of Syriza, seeing it as a precedent for its own electoral chances in the Spanish election later this year.

"Hope is coming, fear is fleeing," said Podemos party leader Pablo Iglesias (below), quoted by AFP news agency. "Syriza, Podemos, we will win."

He told a gathering of about 8,000 party faithful in the eastern city of Valencia: "We are going to be smiling tonight."

Podemos shocked the Spanish political establishment this winter by taking the lead in opinion polls.

Reply
avatar
mattyboy
admin
January 25, 2015 at 7:22 PM ×

Whammer/LB. wanted to come back with a comment from MM’s previous post about my bullish view on USTs. there’s a few layers to my thesis for why I believe the motel will be moving the US long suite from room 2.44 down to the first floor this year, room 1.xx. Cognisent that these comment sections aren’t supposed to be pages long, I thought I’d just lay out a couple of themes briefly and link a couple of charts

Theme 1/ Triffin paradox. Shale revolution means supply of USD via US trade deficit has been in decline. Fed QE has offset supplying world w/ dollar liquidity via the capital account as US investors scour the world in search of yield. The end of QE3 and Fed’s move toward tightening results in dollar squeeze that will reverse the tide. Result: USD, US asset +ve, EM -ve
http://tinypic.com/view.php?pic=307w0uw&s=8
https://www.youtube.com/watch?v=MKOTQCpJGUs

Theme 2/ No Fed QE = rotation into high quality liquid assets from illiquid assets. by now I trust most punters are aware of the effect the *flow* of Fed QE has on risk assets. In the post-crisis era, removal of this flow of liquidity has ushered in periods of higher mkt vol and liquidity premia. USTs are the most liquid asset in the world and CB QE interventions are steadily removing govt bonds from the mkt. In addition, other factors (macropru, central clearing OTC derivs, Basel 3, liquidity coverage etc. etc.) are all having the same effect: encumbering increasingly scarce high quality liquid collateral
http://tinypic.com/view.php?pic=292ll5c&s=8
http://www.treasury.gov/resource-center/data-chart-center/quarterly-refunding/Documents/TBAC_Discussion_Charts_May_2013_r.pdf%20-%20Adobe%20Acrobat%20Pro.pdf (pp.50 – 81)

Theme 3/ disinflation/deflation coming to a store near you. the motel just moved the US long suite down the hall to room 2.37 on friday. the ECB, BOJ, BOC, etc. have decided the only game left in town is to devalue and for now the US will be forced to absorb these moves. This is disinflationary via import price effect and it is a headwind for US multinationals. To your point LB, there is only so much of this that the Fed will allow before they pull a policy u-turn. I honestly believe that they want to hike before they pull this u-turn and, even if they didn’t, on a relative basis now that we are entering the NIRP era, the USD/US bonds are looking mighty attractive if you’re a global bond manager. if the Fed does hike it will be remembered as one of the biggest policy errors of our time (an ECB c.2011 Trichet moment, if you will…)
http://tinypic.com/view.php?pic=ffcyrn&s=8

Theme 4/ Commodity prices, what they signal about global growth/demand. Hoisington put out a solid piece that covers a lot of what I could say so I’ll just link that and a chart
http://tinypic.com/r/1zojllx/8
http://www.hoisingtonmgt.com/pdf/HIM2014Q4NP.pdf

Reply
avatar
Anonymous
admin
January 25, 2015 at 9:24 PM ×

Per FactSet, 18% of SPX has reported. 4Q14 EPS expected 0.3% vs 8.5% on 9/30/14; sales 0.6% vs 3.7%.

Reply
avatar
Anonymous
admin
January 25, 2015 at 9:32 PM ×

Just picked up 28 barrels of WTIC today, paid for with a one ounce gold Eagle.

Reply
avatar
Anonymous
admin
January 25, 2015 at 11:27 PM ×

wow 28 barrels - you must own a very large basement - that stuff stinks like hell if it leaks, but that wouldn't even be my biggest concern.

Reply
avatar
Anonymous
admin
January 26, 2015 at 12:08 AM ×

My biggest concern is that I overpaid.

Reply
avatar
Anonymous
admin
January 26, 2015 at 12:39 AM ×

Forbes: $BM to cut 110,000 jobs next week amounting to 26% cut of global workforce.

Reply
avatar
Nico G
admin
January 26, 2015 at 5:47 AM ×

is that so? the figure looks enormous

Reply
avatar
Anonymous
admin
January 26, 2015 at 1:10 PM ×

LEIs pointing to an improving Europe even before ECB shot bazooka:

http://www.financialsense.com/contributors/chris-puplava/biggest-contrarian-plays-2015-thanks-ecb

Rossmorguy

Reply
avatar
Anonymous
admin
January 26, 2015 at 1:55 PM ×

And fixed income? Let's just say that when you can be long 10 year UST versus BTPs and pick up 30 bps of positive carry, you're supposed to do that until your (appendage of your choice) falls off, aren't you?
=====

ahahahahahha bellissima. I've been saying the same thing for the lastr 3 months!

Reply
avatar
Anonymous
admin
January 26, 2015 at 2:25 PM ×

At CV

"But in a rapidly ageing world, it becomes relevant to, at least, consider that too much fiat money end up chasing too little yield."

Bingo! I'm surprised this doesn't get discussed more. All that money and no good place to put it.

Reply
avatar