Big Day #1

At last, big day #1 has arrived.  Ever since Draghi dropped the big hint on October 22nd, today has been eagerly awaited by punters and analysts alike.  It's hard to believe that EUR/USD was above 1.13 to start that day; it feels like it's been sub 1.10 for a lot longer than that.

Following on from yesterday's post, Macro Man has been somewhat bemused by the price action  ahead of the ECB, but he probably shouldn't have been.  Fixed income has been rock solid, the euro has remained close to its lows despite some indifferent news flow, and the equity market has had a bit of a pullback.

If we compare the normalized cumulative moves (using 2014 volatilities) in these three assets, we find that Eurozone equities have been the worst performer of the three, and not just because of the August-September Chinageddon.

 

Markets generally like to back a winner, but even more so as the end of the year approaches and the race to get paid is on.   For better or for worse, European equities are looking primarily like a value play at the moment, and that apparently is just not sexy enough for Santa.

Because the ECB is far from a monolithic institutions, it's always difficult to know what to do with "sources" stories, since there are so many potential...errr....sources.  Back in the old days when you'd see a few hundred thousand euribor options go through an hour before the "sources" story hit the tape, you could have a pretty good idea that the source was close to the top.   These days, who knows.

Regardless, the story yesterday that the staff would make only minor (some might say trivial)  adjustments to their forecasts would certainly appear to call into question the scope for dramatic further easing.   After all, if the outlook hasn't changed dramatically, why wheel out the bazooka?  This was also the general tone of the earlier story that was referenced in yesterday's post.

If we look at spot inflation dynamics, we also find little rationale for additional easing.   Yes, the headline inflation rate is close to zero, but a goodly portion of that is energy; ex-energy CPI is 1.0%, up from 0.5% 18 months ago.



Importantly, the recovery in prices has broadened.  At the beginning of the year, only 7 of the 12  major expenditure categories had positive y/y price changes; now, 9 do.   The chart of the median CPI of these categories clearly seems to suggest something of a turning point vis-a-vis underlying price dynamics.



Throw in some more favourable energy base effects moving forwards, and it's easy to see headline CPI snapping back in H1 next year.  No doubt the Germanic contingent of the ECB is thinking that this is exactly what's going to happen.  So, too, may Draghi for all we know.   But Super Mario has proven to be nothing if not a master pragmatist, and having essentially promised action in October, he'll be keen to deliver today.   If it pours gas on  a nascent fire, so much the better for ensuring recovery.

As noted yesterday, however, Macro Man cannot shake the concern that there will be some disappointment.   So credible has Draghi become that it seems that few are even prepared to contemplate an outcome other than over-delivering (having under-promised via these recent 'sources' stories?)  Those of us who were heavily long the European short end in the first half of 2013 can certainly recall a period when Draghi did not over-deliver, though of course that's ancient history.

But when he sees broker notes suggesting that a 2-3 big figure drop in EUR/USD today is a likely outcome, Macro Man gets nervous.   Throw in the Fed saying the sorts of things that they should have been saying two years ago, and he gets even more so.   He remains small short EUR, but has to concede that if he had a bigger position he'd be sweating...and looking for some longer dated low delta upside as a hedge.
Previous
Next Post »

20 comments

Click here for comments
Anonymous
admin
December 3, 2015 at 9:16 AM ×

EU economic growth increasing - ECB will launch more QE, cut rates.
US is approaching recession - Fed has abandoned QE, will hike rates.

rofl

Reply
avatar
Anonymous
admin
December 3, 2015 at 9:40 AM ×

Dax is being front-run heavily be big money, looks like the ECB have already told the banks that more easing is coming today.

Reply
avatar
Anonymous
admin
December 3, 2015 at 10:32 AM ×

Ex energy at 1% is what Draghi has a problem with because this is where inflation will stabilise at when the base effects of oil fall out of the yoy headline figure. The data has been positive recently but its important to not lose sight of the bigger picture, growth is still stuck at low levels, 1.5% growth is not bad but its not going to close the huge output gap very quickly. I say fair play to Draghi for wanting to be pro active and get ahead of the curve. The EUR could very well pop higher today especially with non farm tomorrow but I think it will be faded pretty quickly given the medium term outlook for the ECB/FED divergence.

Reply
avatar
December 3, 2015 at 12:56 PM ×

The rate decision was erroneously leaked/hacked on the FT. Already a bit of shit show. Things look in line to underwhelming.

Reply
avatar
Quarrel
admin
December 3, 2015 at 1:43 PM ×

Heh. Fireworks indeed.

Go the FT.

Not sure Draghi had any hope of keeping everyone satisfied.

Reply
avatar
Polemic
admin
December 3, 2015 at 2:31 PM ×

Fading expectations of CB actions into CB announcements has been the trade of 2015.
ECB do it again
Almost too easy this ..

Anyone going for a 'no fed hike' for the multi forecast Ladbrokes special?

Reply
avatar
Anonymous
admin
December 3, 2015 at 2:47 PM ×

Citi experiences extraordinary levels of market volume following ECB decision. EURUSD 500% to 600% higher as normal

Reply
avatar
Cityhunter
admin
December 3, 2015 at 3:13 PM ×

Wow, what a bloody slaughter of crowed trade

Reply
avatar
CV
admin
December 3, 2015 at 3:35 PM ×

The proctologist is busy today.

Reply
avatar
washedup
admin
December 3, 2015 at 3:47 PM ×

I just heard a loud thud - did Leftback fall off his hammock from sheer excitement?
Paradoxically, the more adverse a reaction we get to the ECB decision, the more likely it is that Yellen believes the way to fellate the market would be to, first and foremost, meet its expectations, which in the case of the US implies a hike.
Like I said yesterday, will be an interesting few weeks. 2's/10's could be in 15-20 bps by the time its all said and done.

Reply
avatar
Anonymous
admin
December 3, 2015 at 3:56 PM ×

Big day also for Brazil ... EWZ up 3+% this morning ... an anti-Dilma rally?

Reply
avatar
abee crombie
admin
December 3, 2015 at 4:10 PM ×

Technical stops taken out in Euro this morning, though honestly not sure why ppl still do that. But that was fun trading.

In other markets, the MLP's are getting hammered again, as Natural Gas ekes lower. Year end selling written all over this one but until gas/oil price pop, its a tough trade. This time HY &IG pipleline bonds are getting hit as well.

ISM services crap again, inline with MM theme of everything surprising to the downside.

CCC bonds have stopped going down at least. As long as oil holds in hear I'm gonna stay in the bull camp

Reply
avatar
CV
admin
December 3, 2015 at 6:21 PM ×

Position squaring all over the place as far as I can see... which includes short covering in some of the more crowded equity trades. My main take on the ECB, well ... biggest story (on the day) is really that they CUT inflation forecasts, but opted to deliver less than the market expected. Speculations as to why will mount, but perhaps Draghi and the uber doves struggled to get the rest aboard on the kitchen sink.

More generally, this is a significant further easing package committing to much lower rates, for much longer and more QE. Of course, it will take a while before that reality sets in. December looks difficult now, with Draghi cancelling x-mas.

Reply
avatar
Nico G
admin
December 3, 2015 at 7:19 PM ×

Eurostoxx futures, the busiest, most liquid contract in the world are down FIVE PERCENT. Crowded long trade it was

no triumph here but if some of you paid attention to my warning two threads ago regarding Draghi Santa... it would made me feel useful as the resident 'cautious' grandpa. 'Normal' trading is back, the CB put slowly dissolving.

i built such a massive short this week i have to take 2/3 off the table at close tonight the rest may run into January

Reply
avatar
Anonymous
admin
December 3, 2015 at 7:20 PM ×

I was expecting EUR to rebound as the part of "buy on news", though the magnitude is still surprising.

Interesting development on US equity. Now we are two weeks away from Fed lifting rate, I would think that it is another chance to load equity, because the first rate raise usually won't be the straw to break camel's back. So there is likely to be another round of SP rally here, maybe the last before the next financial crisis.

Reply
avatar
Anonymous
admin
December 3, 2015 at 7:25 PM ×

An inverted yield curve (2-10) has always been, and will almost certainly be again, a necessary precursor to the coming financial catastrophe. I bring this up today because the curve is having one of the most steepening 1-day moves in years.

Reply
avatar
Leftback
admin
December 3, 2015 at 7:56 PM ×

Yes, punters, that thud was indeed LB falling out of the hammock and rolling on the floor laughing at the spectacle of so many traders caught offside. We did mention that short EURUSD was a crowded trade, didn't we? Now that, my friends, is a squeeze.

Wish we had traded the EURUSD directly from the long side, but like Nico we elected to trade equities instead, in our case we were long SPY puts and it's been a decent day. The surprise to us was the massive reversal in US rates, but this seems to us a perfect opportunity to reload our long US fixed income position, as the US data seem to be getting weaker by the day.

Reply
avatar
Leftback
admin
December 3, 2015 at 8:47 PM ×

Spoos seem to more or less bounce off the 50 day moving average, and we closed our options punt. One simple reading of the price action is that the selling is over for now, with Spoos now pinned into a narrow range between the 50 and 200 dma. So that means equities may be boring for a while. Meanwhile fixed income and FX are where all the volatility promises to be in the next few days. We will probably take a pass on tomorrow's trading after the BLS Random Number Generator but we will be keen to pick things up after the dust settles. For now, we have added modestly to our long TLT and AGG positions.

Reply
avatar
Anonymous
admin
December 4, 2015 at 12:10 AM ×

AnonymousNovember 30, 2015 at 11:09 AM
"Just buy european equities,sell euro, sell oil.. What could possibly go wrong."
Apparently not much with the BOJ supporting all equity bids. There are times when QE is free money. This is one of them."

The holiday grind ups give such a fall impression. See China's week off after their slaughter and Thanksgiving after Paris.

Bund is back to the previous ECB, Esx back to Monday after Paris. Grind up in ignorance then reality. But, if we're all making money, whatever works.

Would love an opec surprise. USD might help.

Reply
avatar
Rossco
admin
December 4, 2015 at 1:04 AM ×

"Time for caution on the Euro"

MM - credit where credit is due. Sometimes the simple ones are the best and this was superbly thought out, clearly enunciated and profitable.

Satisfaction guaranteed indeed

Reply
avatar