Thank you, Richard Breslow.
The (sometimes angry) former FX trader whose commentary we regularly excerpt in these pages is out on Friday with his take on Mario Draghi’s opening remarks at Thursday’s post-ECB-decision presser and they reinforce exactly what we said as the euro began to soar.
Recall this from our on-the-fly take:
Here’s the euro, and again, the reaction to the policy statement was muted, but the move higher around the opening remarks is, well, remarkable:
That’s pretty clearly a reaction to these statements:
- DRAGHI: HEADLINE INFLATION DAMPENED BY ENERGY PRICES
- DOWNSIDE RISK TO OUTLOOK MAINLY DUE TO GLOBAL FACTORS
See why that matters? He’s just saying the same thing he said in Sintra, only not as explicitly.
Read below as Breslow explains why that assessment was precisely correct…
When ECB President Mario Draghi spoke, the markets listened. He set off an immediate debate about whether he was dovish or hawkish. He was in fact mildly dovish. But as the euro took off, focus turned to the fact that he confirmed tapering would be on the bank’s autumn agenda. A hawk in dove’s feathers? It took a while for equities and bonds to sort out the words versus the currency’s reaction, but their traders were said to have ultimately reacted to his “reinterpretation” of the Sintra remarks and lack of seeming urgency and ultimately came to a more benign interpretation. So who was right? Both.
- Think about what different asset markets care about and then think of what was actually the most important line of the day. It wasn’t the upbeat economic conclusion, the tapering discussion, which can’t have come as a major surprise, the inflation mandate reminder or the no rush messaging. It was “downside risks primarily relating to global factors continue to exist”
- That throw away line, that people came to expect and then ignore, was very likely to have been delivered with serious intent and forethought. It wasn’t just another excuse to not do anything. After all, other global central banks have gotten more upbeat. Remember all the recent conspiracy theories about rates?
- Rather, despite a quieter euro area internally, from a European perspective the world looks like an increasingly dangerous and unstable place. Carrying serious implications for their prosperity and safety
- Markets have gotten used to treating bad events as the next dip-buying opportunity. Draghi doesn’t have that luxury, especially when being goaded to get on with normalization already
- Even the use of the word “factor” in place of “headwind” won’t have been accidental. A factor, to an economist, is an input inside and part of the models. It isn’t some exogenous error factor to be considered. Factor, in fact, trumps headwind
- The list of real threats, from near as well as far, has been growing and when on the ground there it doesn’t feel like just 24-hour news cycle entertainment. They witnessed the G-20 first hand. And issues like the recently escalating fight with Turkey may sound like titillating trash talk to an American audience but to a German it represents a real economic and societal threat. Then throw fuel on the fire from the latest developments out of Washington and it’s little wonder he has reason for caution
- The euro soared because by comparison Europe is looking a lot more compos mentis than America. And that’s what FX traders look for. Bonds rose because the ECB is in fact not about to do anything rash and certainly not anytime soon. Equities are mixed while they sort out his attention and sensitivity to financial conditions with a currency trying to get ahead of itself and a world where global trade seems to have a lot of stories about arms sales
- Everyone got it right. But not for the reasons expected. And I’m willing to bet that when Draghi watched how markets reacted to his press conference he figured they got it right
Kinda makes us wish we would have kept our original title, which we later tweaked:
— Walter White (@heisenbergrpt) July 20, 2017