President Trump can't see a central banker without taking a shot , and it seems they don't e


ref :- "Trump rails at Draghi's QE comments" , The Financial Times, International Section .... and "Tail Risk", The Financial Times, Companies and Markets

Talk about making yourself a hostage to fortune .... by the time most of you read this, the US Federal Reserve will have concluded their two-day monetary policy meeting , announced their decision and communicated their thoughts to the world. Making predictions that may already have been proved wrong by the time anybody hears them seems like a mug's game, so we'll just say that the most widely expected outcome is that there will be no change in rates today, but that Chairman Powell will further prepare the ground for a rate cut (or cuts) later in the year .... possibly as early as next month. Any variation from that outcome and you can expect the appropriate market reactions .... and of course you can also expect President Trump to let everyone know what he thinks about the Fed's actions, or lack of them. If it's the latter, the presidential tweets are unlikely to be complimentary.

Donald Trump is not the first president to try to influence Fed policy by any means. Though his blatant, in-your-face manner of going about it (in an era when politicians influencing central banks is widely considered beyond the pale in the developed world) is pretty striking, we have seen it before. What is almost unheard of is politicians criticizing the central banks of other countries than their own, and a president teeing off at the boss of the European Central Bank, in the way that Mr Trump has just done at Mario Draghi must be something of a "first".

The ECB has been having a get-together of its own, it's annual jaunt (sorry .... its annual "forum") in Sintra in Portugal. At its conclusion, ECB president Mario Draghi opened the door to the possibility of cutting rates (further into negative territory) and resuming Quantitative Easing (its bond-purchasing programme). Such moves would be an attempt to boost faltering growth and more specifically to get inflation up towards its 2% target. Mr Draghi's words sparked a pretty sharp rally in equity prices and a pretty sharp fall in bond yields (which of course means higher bond prices). The 10yr German Bund yield fell to a record low of MINUS -0.32%, and the yield on France's 10yr debt went below zero for the first time. Even the yield on 10yr Italian debt fell 24 basis points (well, these days any positive yield is not to be sniffed at).

**** Incidentally, global yields have bounced a touch this morning on confirmation that the Presidents of the USA and China will hold a bilateral meeting at the G7 conference in Tokyo next week. The implication is that the news increases the chances of a resolution to the trade conflict. Such a resolution would be a boost to global growth, which of course would reduce the downward pressure on rates and yields. There's a very long way between confirmation of a meeting and a successful outcome, particularly given the nature of at least one participant and his hit-and-miss record on such occasions in the past, but the fact that the markets reacted to the news at all is a fairly accurate reflection of just how hyper-sensitive the markets are just now ****

Anyway, the other main effect of Mr Draghi's doveish tone was to weaken the Euro. In truth, the move was hardly dramatic but it was enough to get old Donald's goat. He effectively accused the ECB of currency manipulation, of deliberately following a policy of weakening the Euro to gain an unfair trade advantage for the nations in the Eurozone. He likened the EU to China in that respect, and said that "they have been getting away with it for years".

The President has a long track record of accusing others of currency manipulation even when his own Treasury is saying something else. There are plenty of headlines this morning along the lines of Mr Trump substituting a currency war for a trade war, but we can't buy into that idea entirely. This is not a new thing for him, and besides ..... they're both part of the same thing. But his very direct attack on the ECB is something new and may well represent an escalation in the US' trade spat with Europe to lay alongside those with China, Mexico and others.

Some critics will say that Mr Trump's outburst plays into the narrative about his paranoia . In other words , he cannot entertain even the idea that the ECB can be wholly legitimately taking a position in order to fulfil their mandate (with regard to inflation, employment etc). Rather, they must be doing something underhand to get one over the US. His comment that Germany's DAX stock index was way up yesterday due to Mr Draghi's stimulus remarks was correct, but then to say that this was "very unfair to the United States" strikes us at best a little one-eyed and indicative of a persecution complex. Some might say (though not us, obviously) that it also makes the President of the United States sound a bit like a spoiled child.

At the bottom of all this is the inescapable fact that certain countries in the Eurozone (and Germany is by far the largest and most powerful example) have benefited from a currency -- the Euro -- that is weaker than their own currencies would be if they were still in existence. With Germany's massive current account suplus, the theoretical Deutschmark would be much stronger than the Euro, so the common currency has undoubtedly given Germany (and a few other) a considerable advantage. Whether that advantage is unfair (as Mr Trump wholeheartedly believes) is possibly another matter. The Euro may have been good news for Germany in the context of trade, but what about those in the Eurozone at the other end of the scale .... Greece, say ? They need a much weaker currency that better reflects their economic standing.

It's ironic ..... It's Germany and particularly its manufacturing exports that really gets under the President's skin but most in Germany, a nation of savers, would be all for a tighter monetary regime. One suspects that they would happily put up with a resulting stronger currency if they could just get back to some positive yields. But that's the thing with the common currency : no single nation or even a subset of nations within the Eurozone gets to choose policy. That is set by the ECB with the entire Eurozone in mind, as it must be, and that's something that has long been a huge frustration for Germany, the Bundesbank and most of its people.

Don't expect Donald Trump to see it that way, though. Some might call him a spoiled child , but when the child is as big, powerful, volatile and adversarial as this one you need to recognize the havoc he can inflict on the status quo. It could just be that even if there is some light at the end of tunnel in the trade war between the US and China (and that's a stretch), the one between the US and Europe hasn't really got going yet.

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