Richard Breslow is back from the weekend and the former FX trader is out Monday morning with a strong piece that begins with a bit of delightful sarcasm.
To be sure, we’ve had our fair share of fun at the expense of those who thought a risk-on move was a foregone conclusion following Macron’s expected victory on Sunday.
The more important point Breslow makes this morning however, is that the proverbial deck has been cleared. The Le Pen black swan is off the table and now, traders can begin to trade. Of course in the post-crisis world, that means we can all get back to focusing on central bank rhetoric. Which still suggests that the world is upside down, but hey, at least we’re not holding our breath to see if a fascist dictator is about to conjure up the ghost of the Reich in France.
Read below as Breslow explains how to read the central planner tea leaves and why the vol sellers may be making a mistake…
Well today’s get rich quick scheme didn’t work out so great. It turns out that more than a few traders had the idea that they’d go with the huge Macron poll lead and superior debate performance and place a little weekend flutter. After all, not that many other people may have noticed. But whether or not the euro, bund yields and the like behaved as hoped on Macron’s win isn’t really dispositive of anything. Put it all down to noise.
- This is noise of a good sort. Markets didn’t gap and die, like they’ve been doing. If you think this election was an unmitigated positive for things Europe then there’s still plenty of time to jump in. If you just know that nothing ever changes and the social and economic ills live on, well most of the first round bounce is still there to be faded
- Counter-intuitively, the post-election wave of implied volatility selling is probably a mistake. Yes, the digital risk of a black-swan event, such as it was made out to be, is gone, but that was more an excuse for people to not trade. If the near or intermediate direction of asset prices is to be decided by economic numbers and projected central bank policy, that’s something you should be comfortable positioning for
- Clearing the decks actually makes the potential for trends to emerge greater, not lesser
- The number one question in your mind should be, what, if anything, this means for ECB policy? Do you really think this could push them to be explicitly more hawkish? Will they test the waters with speeches full of veiled hints? One thing you know for sure, the market will be hyper-sensitive to anything smacking of tapering. And react accordingly. They want to believe
- But don’t get too invested following the Germans. We’ve heard what they think. Watch Peter Praet for trial balloons. See if President Mario Draghi has even a soupcon of different body language when he speaks on Wednesday
- And don’t fall into a mindset where you mentally fade every Fed comment and blow out of proportion every ECB one. The FOMC also has a plan that they’d like to stick to
- So during this thought period what to watch? The euro back above 1.10 would be impressive. Below 1.0850, a clear failure. If you are micro-managing, use 1.0960 as a super short-term pivot of sentiment
- The euro isn’t only down against the dollar and yen. It’s down versus most of Eastern Europe. This is actually a healthy sign for the region more broadly, so be careful misreading this as a warning sign. It’s bullish in the grand scheme of things. If it lasts
- If the ECB has any plans to be less generous, then bund yields don’t belong here. Until they get motoring above 50 basis points in yield, there’s something wrong with the blast-off scenario. Back above today’s high and traders might just try to see if they can gun for it. If yields fall back below 30 basis points you won’t be able to get the sound of Robert Preston singing “Ya Got Trouble” out of your head
- European equities have been on a tear. Momentum here is the key. It could very well be that it’s as simple as watching how they trade around today’s highs. They look great, but can’t really afford any setbacks
- And, because I can’t resist, watch gold at 1220 for a great pivot level on general world view