Why start banging on about Thursday already ? Is there nothing else to write about ?
Well , of course there is ..... At the forefront of most minds on this sombre Monday morning in London is another terrorist attack, but without meaning to sound callous or uncaring (we're always having to apologize for this) such events are not generally significant market drivers. There was a short-lived, knee-jerk reaction as sterling was marked lower on foreign exchanges early this morning, and it's possible that the security issue becomes a factor in the UK's general election (more of which later), but for now at least we'll leave discussion of the appalling London Bridge attacks to others.
We could and probably should mention Friday's US employment data, within which the smaller-than-expected increase in non-farm payrolls has disappointed some. It's done nothing to dent expectation of a rate hike next week (still over 90% probable, according to markets) but the chances of another one in September are looking less likely by the day, especially as there's is little pressure from inflation. December still looks favourite for the third rise of 2017, a scenario that would fit with the Fed's own forecasts.
*** Incidentally, falling yields on US Treasuries do not point to either burgeoning growth or inflation and much is being made this morning of the diminishing gap between the yield on the 2-year and 10-year securities -- a flattening of the yield curve. Back in December, the yield on the 10-year Treasury was nearly 140 basis points above that of its 2-year equivalent --- that spread has now narrowed to just 87bp. Such a flattening not only betrays faltering confidence in the much-heralded Trumpflation scenario, but is a powerful factor in recent Dollar weakness. ***
So what's going on on Thursday, then ?
The next meeting of the European Central Bank, for a start. There's plenty of speculation that the ECB will acknowledge the improving growth numbers pretty much throughout the Eurozone by bringing up the subject of a change in its historically loose monetary policy. Such a move would be welcomed by German representatives in particular, though influential ECB board member Benoit Coeure also seems keen to formulate a plan. But ECB boss Mario Draghi and chief economist Peter Praet are doggedly cautious (should that read "doveish ?"), and memories of 2011 will still be raw for the ECB. Back then, an early tightening of policy threw what looked like a decent recovery taking shape into sharp reverse.
The most likely outcome is that there will be some tweaking of the language in the ECB's statement, a minor adjustment in its "Forward Guidance". As Marc Chandler of Brown Brothers Harriman has suggested, in the past they have talked about how rates will remain at the current level "or lower". This time, they could simply drop the "or lower". Doesn't seem like much to get excited about, but markets can often read a lot into such nuances. The trouble on this occasion is that even if the timing and pace of things is still unclear, just about everybody is already assuming that Eurozone rates have bottomed. Even if the ECB does change it's forward guidance in that manner, it won't be saying anything that the market doesn't know.
There's also that UK election on Thursday. If we've learnt one thing in recent years it's that anything can happen in politics, so the early predictors of a significantly increased majority for PM Theresa May's Conservative party (100+ seats, say) were always making themselves hostages to fortune. Nevertheless, who could possibly have imagined that we might be discussing the possibility of a hung parliament ..... and even , would you believe, a victory for the Labour Party ? Most of the market discussion had centered around how many extra seats the Tories would need for Mrs May to be able to override the more radical Brexiteers in her party and negotiate a (mildly) softer, more market-friendly withdrawal.
The opinion polls (bless 'em !) are all over the shop but after a shambolic campaign, one suspects that the Tories would now be happy enough with any kind of significantly increased majority. So too would the markets -- a margin of victory resembling the current standings would be a severe disappointment, a minority government would be taken as much worse in terms of economic management (but interestingly throws up some questions about "hard" or "soft" Brexit), and as for a Labour victory ? It couldn't happen, could it ? Not even in this crazy new world ? As far as markets are concerned. the thought of the impossible happening and the accession of a "Tax and Spend" socialist government, or "Tax and Spend, Spend, Spend" as the markets would see it, brings to mind the infamous tabloid headline of the 1980s -- something about the last one out turning off the lights.
In many ways, the most interesting event on Thursday (especially from a global perspective) is sacked FBI Director James Comey testifying before the Senate Intelligence Committee. Part of the testimony is televised, part of it is held in closed session, which is where any sordid details are likely to emerge should there in fact be any. No matter, we'll hear soon enough. If it's revealed that the President tried to end the investigation into "the Russian Connection", that would open up the way for a possible impeachment of the President and some massive market reaction -- presumably huge flights to quality, Treasuries up (yields down), stocks down, dollar down.
It probably won't happen, though. At least, that's the view of Morgan Stanley's Jim Caron .... and what's more, "once it's over, it's over". The balance of opinion seems to favour this scenario, but to us it would seem foolish to dismiss the possibility of something seismic occurring. If it does, then it won't be 2011 we're taken back to ..... nor the 1980s. It'll be the 1974, Nixon, Watergate and all that.