Draghi plays for time, all eyes on Yellen
In spite of huge market expectations, Mario Draghi gave little information about the future of the QE and played for time once again. As broadly anticipated the European Central Bank did not change the level of any of its three key interest rates. However, investors were hoping Draghi will come with a plan regarding the future of the central bank’s quantitative easing program. The ECB’s president chose to leave if for the end of the year as he declared the QE will run until December and beyond if necessary.
Investors were also expecting a reaction to the euro appreciation of the last few months. They were quite disappointed again as Draghi only declared that the “euro volatility represents a source of uncertainty.” That’s it that’s all. Investors will have to wait until the next meeting in October or most likely in December to get answers to their questions.
EUR/USD spiked to $1.2059 during the press conference and continued to rally during the Asian session, hitting $1.2092. The fact that Draghi appeared not too concerned about the euro strength was interpreted as a bullish signal by investors and they quickly forgot that he did not provide any hint about tapering.
With the ECB meeting behind us, investors will focus on the next big event that is the FOMC meeting of September 20th. Although the Fed hiking cycle seems on pause for now as the market is not pricing any interest rate hike before next year, investors are impatiently awaiting the Fed to finally reveal the starting date of its balance sheet unwinding programme.
On Friday the greenback kept losing ground against most of its peers as US rates dipped lower. The dollar index slid to 91.01, its lowest level since January 2015. The US 10-year treasury yield accelerated its debasement and 2.0144% this morning while the monetary policy sensitive 2-year yield was down 1.25%.
Markets dump USD on artificial comfort level
Great article in Bloomberg highlighting the disappearance of volatility in FI due to central bank’s interventionist policy. To reiterate a well-understood fact, central banks are suppressing the true price of risk in rates, which in turn are distorting all other market risk measures. Worryingly investors are significantly underpricing the real price of risk. Seven months ago Greece 2-year yields were at 9.5%, now stand at 2.67%, on par with dysfunctional Argentina and only 60bp above AA New Zealand. In terms of Greece there is the view that ECB convergence trade is back on (thanks to Merkel clear pro-EU platform and yesterday’s Macron speech on EU integration), making Greek sovereign debt ultimately backstopped by the ECB.
In broader terms, rightly so investors are aware that Central banks have discovered the miracle solution for managing debt and default avoidance, unadulterated raw capital creation. So if there is no longer credit risk (currency risk can be hedged) any return is a good return. This is also why the Swiss National Bank stock (yes the SNB is a publicly traded company) continues to rally. Printing CHF to buy asset such as EUR and equites (over chf60bn in stocks) is a great business model. VIX index is trading at 12 despite the lingering concern of potential nuclear war. Capital continues to flow out of the USD and into emerging markets as risk sentiment remains strong.
