Monday 16th October 2017
Like Oscar Wilde , Mark Twain was a font of pithy quotes but we can't agree with him entirely on this one, or at least we're pleased that not everyone else does. Where would the markets be without speculators ? And where would we all be without markets ? We would counter any claim that our's might be a nakedly self-serving point of view by stressing that while markets cannot function without speculation, it should only be undertaken with enormous care and discipline and be backed by eminently plausible rationale -- just as our punts always have been.
In a piece this morning on hedge funds and how they're placing their bets at the moment, Reuters pointed out that according to the latest positioning data published by the Chicago Mercantile Exchange, speculators' net "long Euro" positions in currency futures last week were at their largest for over six years. In fact, the data showed that the Euro has only been more heavily backed six times since inception. This we found a little surprising .... not wrong necessarily, but with EUR / USD treading water around $1.17 - $1.1850 after backing off from the early Sept. highs above $1.20, it seemed a slightly strange time for the specs to be piling deeper into the "long Euro" story without some new fundamental development to support it.
Plainly, the majority of speculators believe that the longer-term uptrend for EUR / USD that has been in place in 2017 (despite most New Year predictions) is just taking a breather. That presumably means that they are unconvinced by the wisdom of the reappearance of the "Trumpflation" trades that last held sway before the President had taken office, and before the markets had realised quite what a pig's ear the administration was going to make of early attempts to implement their agenda. If it was the new tax proposals that initiated the recent support for the Dollar and the upward moves in Treasury yields, we have to assume that on balance, the specs don't believe that they'll make it through Congress in anything like their current form -- and they wouldn't be alone in that.
Nevertheless, we were wondering how the Euro longs were feeling about the weekend's events. In Austria, Sebastian Kurz led the polls after pushing his conservative People's party to the right with a tough anti-immigration agenda. Most likely, he will form a coalition with the far-right Freedom party who will seek a high-price for their cooperation and are nobody's idea of the EU's greatest supporters, even if young Mr Kurz might be. Other combinations are possible : a coalition between the People's party and the ousted Social Democrats for example, though that would seem to renege on Mr Kurz's promise to shake up the old two-party system. Or a coalition between the Freedom party and the Social Democrats, perhaps ? It's hard to imagine that a deal between two such politically disparate entities could be a realistic possibility.
Whatever combination emerges, don't expect Brussels to be overjoyed at the outcome. Austria may be a comparatively small nation but economically it punches above its weight and the EU needs a stable and supportive Austria and not one tempted to follow the example of more troublesome Mittel - European states like Hungary, Poland and the Czech Republic.
Somewhere that definitely isn't small in EU terms (or in any other way) is Germany, and the news from there at the weekend could also have been better. The German Social Democrats, after a string of poor election results, managed to win most seats in the Lower Saxony regional ballot. Their coalition with the Greens that has been in power won't provide enough seats this time round and will have to be modified, but it's a bad result for Angela Merkel. After a winning but disappointing General Election, the Chancellor is engaged in tricky coalition negotiations of her own and could do without further electoral setbacks. It's not a game-changer in any way, but certainly doesn't add anything positive to the mood-music surrounding the Euro.
And of there's Spain / Catalonia bubbling away .... Catalan president Carles Puigdemont failed today to provide ample clarification on whether he actually declared independence or not. He's now got until Thursday to do so, and faces the implementation of Article 155 and quite possibly direct rule from Madrid. You can attach as much weight as you wish to what's going on in this corner of the EU, but hands up anyone who thinks it's Euro-bullish ? Quite ....
Mind you, remarkably it's not affecting markets which in this,as in so many areas, are shrugging off what in previous times might have been considered serious market-moving issues. The weekend's doveish "cooing" from the ECB and more hawkish noises from Fed boss Janet Yellen (despite more softish inflation data on Friday) have also been dismissed by EUR / USD traders.
We'll wait to see if these speculators are right in assuming that the uptrend for the Euro will reassert itself soon enough, and wonder at the same time just what kind of development might be big enough to upset their seemingly unshakable belief. The appointment of a hawkish new Fed Chairman, perhaps. If either of Messrs Warsh or Taylor (an outsider gaining ground) get the nod, we may get the chance to find out.