2016/10/21 Commentary: Draghi a Bit Soggy
© 2016 ROHR International, Inc. All International rights reserved.
Extended Trend Assessments reserved for Gold and Platinum Subscribers
COMMENTARY: Friday, October 21, 2016
Draghi a Bit Soggy
It was not necessarily the ECB President’s fault that Thursday was less than inspiring. There is just too much that is still pending on the further evolution of the ECB’s Quantitative Easing (QE) program which will be finalized in December. With the other central bank influences from Wednesday’s Bank of Canada interest rate (non-)decision and that afternoon’s Federal Reserve Beige Book out of the way as well, there is not much to inspire the equities or govvies. The leading trend momentum right now is in the foreign exchange on the impressive extended strength of the US Dollar Index. However, even there the US Dollar Index rally is more so reflection of the heavily weighted euro’s weakness. And that is based on all the still weak European and international data that leaves US dollar the default purchase rather than outstanding reasons for secular strength in the greenback.
This all gets back to the reasons for the ECB to likely come up with a more extensive QE tactical plan for once the current program is due to expire in March; even if that will be over the protestations of the less profligate German contingent. However, the result of the further deliberations was to leave Thursday’s press conference opening statement and Q&A full of responses like, “Waiting for further review of the various committee’s suggestions” and “No, it was not discussed.” As such, these were not very inspiring for equities that were waiting for more direction after weakening data.
Quite a bit of that central bank psychology relates back once gain to what in the world the FOMC might actually do in December. In spite of some bright spots, the continued weak international data reinforces the views in our recent posts. Those were last Thursday evening’s Commentary: Fear of Fed…with a twist which has fully updated (from after last Friday’s US Close) Market Observations in the lower section. For anyone who has not read it, there is a very interesting consideration of the changes to FOMC voting members into January that deserves review. There was also Tuesday morning’s very brief Quick Update: Feeble Figures… again that is also reinforced by more recent weak economic data.
HOLIDAY NOTICE: With this week’s central bank influences out of the way with little equities or govvies response, we are taking off the first part of next week to prepare for the more major late month data releases from the end of next week into the following week.
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.
NOTE: Back on the evening of December 8th we posted our major Extended Perspective Commentary. That reviews a broad array of factors to consider Will 2016 be 2007 Redux? For many who believe that the US economy is really strengthening and can once again lead the rest of the world to more extensive recoveries, this may seem a bit odd.
Yet there are combined factors from many areas we have been focused on since the early part of last year which are less than constructive for the global economy and equity markets. We suggest a read if you have not done so already.
We pointed out in December in the face of another likely Santa Claus Rally this was not an actionable view during the year-end equities rally. Yet it was (and remains) important background to utilize into 2016. This is much like our major late 2006 perspective on Smooth Rebalancing? …or… The Crash of ‘07? In that instance the economic factors built up, but the actual crash was deferred into 2008. It is starting to feel this one may be deferred as well.
▪ In addition to all of our previous views that still stand, a couple of interesting points were explored in the ECB press conference Q&A. The idea was raised that the ECB might simply abruptly stop its QE program rather than ‘taper’. In addition to confirming the ECB would indeed taper rather than stop QE cold, President Draghi gave a sense that the notion of any abrupt end was a bit daft. We agree that this would be counterproductive in what will still likely be a less than stellar Euro-zone recovery.
The same applied to the idea there might be a rate rise prior to the end of QE. He actually referred the questioner back to the opening statement for a clear indication on that. He also swatted away the notion that the ECB purchases of non-Euro-zone corporate bonds was not consistent with the ECB’s mandate. He noted that anything that freed up regular investment funds to purchase corporate bonds was a benefit, and this showed up in the spreads. In a related answer he also noted that purchase of large company bonds also benefited medium sized firms rather than discriminating against them.
Regarding some of the bond markets sharp responses to ECB indications of greater or less QE, he simply noted that the Bank could not base its monetary policy actions on the short term responses of the markets. He gave a similar response to a question about whether any of the sharp bond market movements (we assume the inquirer meant rallies) enticed the ECB into adjusting its position to achieve a short term profit. He dispatched that as well as a somewhat bizarre notion, as the ECB does not attempt to run monetary policy as a ‘for profit’ endeavor; it never really enters any of their deliberations.
And all else awaits the more extensive individual bank committee reviews and suggestions that will form the basis for what is hoped to be a much more definitive ECB statement and press conference on the future of its QE program in December. That meeting is scheduled for Thursday, December 8th.
Extended Trend Assessment is available below.
The post 2016/10/21 Commentary: Draghi a Bit Soggy appeared first on ROHR INTERNATIONAL'S BLOG ...EVOLVED CAPITAL MARKETS INSIGHTS.