Well, I suppose the overarching narrative here for retail investors is pretty goddamn simple: buy the f*cking dip. Every time. Don’t even think about it. Just do it – like a Nike check.
But as usual, there are other things going on behind the scenes. Things like the ECB covertly bailing out the dollar on Wednesday by dropping a “little” hint about the market having “bigly” misinterpreted Draghi’s signaling. That – outlined here – sent the euro lower, but more importantly it catalyzed a rally in bunds, which got some further support on Thursday amid soft regional German CPI data.
As Bloomberg writes this morning, “the ECB’s dovish tone once again establishes the diverging outlook between U.S. and European monetary policy.”
That’s big. You don’t want that spread to narrow too much because if it does, one of the pillars of the structurally strong dollar cracks, and that can become somewhat self-fulfilling as it puts pressure on yields, further undermining the case for the greenback. Remember, the spread shown above had pushed to its narrowest this year going into the week:
“The unnamed ECB source is back, telling Reuters that markets had over-interpreted Mario Draghi’s comments at the last meeting and that a further rise in bond yields would be problematic,” SocGen writes on Thursday, recounting the story highlighted above. Here’s some further color:
A little geekily, I observe that in recent months, the US/German nominal yield differential has overtaken the real yield differential in terms of its correlation with EUR/USD. Both are better correlated with the exchange rate than shorter-dated rates. The 10-year yield spread had narrowed from a wide position of 235bp in late December to as little as 196bp last week and is back above 200bp this morning. If the ECB is trying to anchor bond yields (and if they succeed in limiting how much they follow US moves), then the real driver of EUR/USD for a while will be what happens to US yields. The 2.3-2.65% range looks pretty strong and dooms EUR/USD to its current 1.04-1.09 range. That’ll change if the ECB’s view of the world changes after the French elections (which i suspect it will) and there’s a greater tolerance of higher Bund yields in particular. But for now, we’re stuck.
For context, here’s what we’ve seen since Reuters dropped the ECB tape bomblet:
And a bit more color on what Richard Breslow correctly characterized as “actually a biggie that probably needs greater trader focus”:
- The euro declined for a third day as long positions built in March amid bets for smaller interest-rate differentials versus the dollar are now being squared.
- Sentiment on the single currency has soured after latest comments from officials suggested the market is underpricing potential U.S. rate increases this year and a Reuters report that the European Central Bank sees investors to have overinterpreted its intent to exit stimulus
- The euro dropped below $1.0740 for the first time since March 21 as trailing stops got triggered, according to traders in Europe
- ECB Governing Council Member Erkki Liikanen said Thursday that the euro area is still in need of “a very substantial degree of monetary accommodation for underlying inflation pressures to build up and support inflation in the medium term”
- Latest German regional inflation data have come in on the weaker side, boosting risks that economists’ estimate for national annual inflation at 1.8 percent may not be met
- The Bloomberg Euro Index has moved below its 21- and 55-day moving averages for the first time since March 3 and may extend declines should it close for the day below the technical gauges. Further trailing stops in euro-dollar below the $1.0700 level may come under pressure, while stops are also in place below $1.0650, according to traders
- Demand for the euro has faded this week at current levels with investors now looking to fade a dip toward the $1.0650- $1.0660 area, said the traders. Options worth 1.95 billion euros expire Thursday at $1.07 and may weigh on the common currency
- The Bloomberg Dollar Spot Index rises 0.2% as it rides a rebound in Treasury yields and quarter-end flows still go through the market and support the greenback
Ok anyway, Asian equities were mostly lower and European stocks are mixed on what we might colloquially describe as a kind of “ok, f*ck this, is it Saturday yet?” feel.
As for it being the “day after tomorrow” (so to speak) for the UK, SocGen’s Kit Juckes is waxing poetic this morning:
Meanwhile, in the UK dawn has broken over the new post-Article 50 environment. A beautiful red sunrise greeted me as I arrived at work, warning of rain even as the weather forecasters promise me the warmest day of the year so far.
That’s nice. I guess.
Looking out across regional markets we find this:
- Nikkei down 0.8% to 19,063.22
- Topix down 0.9% to 1,527.59
- Hang Seng Index down 0.4% to 24,301.09
- Shanghai Composite down 1% to 3,210.24
- Sensex up 0.1% to 29,564.01
- Australia S&P/ASX 200 up 0.4% to 5,896.23
- Kospi down 0.1% to 2,164.64
- FTSE 7360.13 -13.59 -0.18%
- DAX 12212.75 9.75 0.08%
- CAC 5067.17 -1.87 -0.04%
- IBEX 35 10358.30 -9.30 -0.09%
We’ll get claims today as usual, along with a whole bunch of other notable data and possibly confusing Fedspeak:
- 8:30am: GDP Annualized QoQ, est. 2.0%, prior 1.9%
- 8:30am: Personal Consumption, est. 3.0%, prior 3.0%
- 8:30am: GDP Price Index, est. 2.0%, prior 2.0%
- 8:30am: Core PCE QoQ, est. 1.2%, prior 1.2%
- 8:30am: Initial Jobless Claims, est. 247,000, prior 261,000
- 8:30am: Continuing Claims, est. 2.03m, prior 1.99m
- 9:45am: Bloomberg Consumer Comfort, prior 51.3
CENTRAL BANKS (All times ET):
- 9:45am: Fed’s Mester Speaks in Chicago on Payment System Improvement
- 11am: Dallas Fed’s Kaplan Speaks in Washington
- 11:15am: Fed’s Williams Speaks at Learning Community Event in New York
- 4:30pm: Fed’s Dudley Speaks in Sarasota