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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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Whether you call it the "Fall" or the "Autumn", the real question is : "When does it start ?"...

September 6, 2017

 

ref :- "Draghi could leave investors in the dark with the QE exit delayed" , CNBC Markets

 

We'll turn the focus away from the Korean peninsular for just a moment ..... not that there's any sign of a healthy resolution . Rather the opposite, in fact. Catching up a little after the Labour Day holiday in the US, markets continued to see further "safe-haven" seeking with gold up again, the dollar lower and US Treasuries particularly in demand  -- the yield on 10yr Treasury Notes fell 9bp to 2.07%. Instead, we'd better take a quick shufti at central bank issues ahead of  the European Central Bank's monetary policy meeting tomorrow. Crises may come and go, but speculation on the intentions of central banks is a constant.

 

Actually, apart from the ECB meeting there's a raft of US Federal Reserve bigwigs wheeling themselves out this week and the comments of the first two of them played a significant part in the move lower for the dollar and Treasury yields (which of course means higher Treasury prices). Quite why anybody should be surprised that board member Lael Brainard should urge caution with regard to rate hikes, and that Minneapolis Fed boss Neel Kashkari is not totally convinced that previous rate hikes have been such a good idea, is a bit of a mystery. Both are noted "doves" , but their caution is beginning to rub off on investors. 

 

Effectively, there is NO chance of a rate rise at the Fed's Sept 19/20 meeting, and according to market prices there is now only a 36% probability of a hike in December. Fed Chair Janet Yellen is publicly still holding out for one more move in 2017, but her faith in decent growth and low unemployment delivering any substantial upward move in inflation towards the Fed's 2% target is not matched by the markets. What we can expect in a couple of weeks' time are some solid details on the timing of the start of the long process of unwinding the Fed's enormous $4.5 trn balance sheet, largely accumulated through its bond-purchasing QE programme. We can also expect a lot of soothing noises about how this will be no big deal market-wise .... akin to Philadelphia Fed president's comment about unwinding the balance sheet "will be the policy equivalent of watching paint dry".

 

Perhaps .... investors certainly should have had enough time to get used to the idea. There are those who take a rather darker view of what effect the process might have on markets, however. They suggest that if the policy implemented to lower rates and yields in order to foster a recovery has been so successful, then surely it's only logical to expect some adverse effects when that policy is reversed. We'll wait and see ....

 

But back to the present, and the ECB ..... it's president Mario Draghi has got some issues to address too, though it's important to remember the thorniest problem that he's facing is one borne from strength rather than weakness. We're talking of course about the strength of the euro bouyed by the best eurozone growth figures for a decade and the apparent disappearance of awkward political difficulties in the Eurozone (don't expect too many market fireworks from the German election).

 

The euro is nearly 14% higher this year against the dollar, and has risen by a still very substantial 6.0% against a basket of currencies that the ECB likes to watch closely. The lower cost of imports has an obvious downward effect on an inflation rate that is already too low for the ECB's liking. The ECB has forecast an inflation figure of 1.3% for 2018 and 1.6% for 2019, but that was based on a EUR / USD rate of $1.09. Calculations of how a change in exchange rate translates into a change in inflation is an inexact science and methods vary, but Mr Draghi himself has said that "as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points". With EUR / USD close to $1.20 already, you can see why getting inflation back to 2% might be a concern.

 

There may be some truth in the notion that the burgeoning growth in the Eurozone will counteract the downward pressure exerted by a strong currency on inflation, but of course in time the effect of a strong euro on exports could undermine that growth. So Mr Draghi will be treading very carefully indeed ..... there will obviously be no change in rates, but do expect him to talk about the strength of the euro and it's effects in non-committal fashion. But what the market really wants to hear about is the ECB's plans for a "tapering", or gradual withdrawal of QE stimulus.

 

And so we finally get back to the rather strange title about Fall and Autumn ...... Mr Draghi said at the last ECB press conference that the governing council would discuss the future of its QE operations "in the fall". Pedants might like to point out that Autumn , or Fall, starts on the September Equinox which occurs on the 22nd or 23rd of that month (who knew there was such a thing as Calendarpedia, by the way ?).  It's utterly irrelevant of course, but if it suggests that the ECB will postpone any comment about tapering then we're happy to go along with that definition and Mr Draghi's adherence to it. 

 

Tapering is in reality a slowing down of stimulus (rather than the course of gentle tightening being contemplated by a Fed further along the cycle), but it will be seen as tightening. Frankly, it seems unlikely that Mr Draghi will want to even discuss such action --  to do so could send the Euro on yet more upward moves , and that's the last thing he wants. The market aren't fools however (well, not all the time), and won't be fobbed off forever. October looks the more likely date for the ECB to talk publicly about its plans for tapering. For what it's worth, the consensus is that it start in 2018 and stimulus will finish entirely by the end of that year.

 

In the meantime, we'll be listening tomorrow to what's said about exchange rates, and crucially to adjustments in inflation predictions.

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