So the “big day” for the markets has come and gone, with a whimper. If there was ever a dullard at a party, it would be Mario Draghi. He did everything in his power to make some changes, that we highlighted, and nothing else. Moreover, he made it clear that he would extend this (seemingly) forever so there was far less volatility Thursday than the previous few days.
The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.
At today’s meeting the Governing Council of the ECB took the following monetary policy decisions:
(1) The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.
(2) As regards non-standard monetary policy measures, purchases under the asset purchase programme (APP) will continue at the current monthly pace of €60 billion until the end of December 2017. From January 2018 the net asset purchases are intended to continue at a monthly pace of €30 billion until the end of September 2018, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim. If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, the Governing Council stands ready to increase the APP in terms of size and/or duration.
(3) The Eurosystem will reinvest the principal payments from maturing securities purchased under the APP for an extended period of time after the end of its net asset purchases, and in any case for as long as necessary. This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance.
(4) The main refinancing operations and the three-month longer-term refinancing operations will continue to be conducted as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the last reserve maintenance period of 2019.
Said another way, with stocks at ALL-TIME HIGHS, “emergency” level rates must continue. Said yet another way —> the ponzi finance scheme of the central planners must continue.
A few days ago we touched on the fact that Thursday is a big day for Europe and the ECB in general, and Mario Draghi specifically. Said another way, if the changes to the current ECB policy do not go over well with the markets, Mr. Draghi alone will be blamed. We said, “The main predictions as of today are for a large slash in its current bond buying from to go from €60BN per month to €30BN per month and last another 3 quarters. When this time period is over, the ECBs balance sheet is expected to have swelled to €2.5 trillion.”
So the day is upon us and the markets have seen increased volatility, especially on Wednesday. The Forex market and currency futures in Chicago will probably see mad volatility Thursday morning; so if you’re not used to it, you probably should not trade it.
Following are a few of the major bank predictions on the looming event…
- Barclays – Think that QE will be extended for a longer period (nine months) but at a lower pace of EUR 30bln per month, and do not rule out a 12-month extension at an even lower pace of EUR 20-25bln. Do not expect the ECB to commit to tapering towards zero at the end of the extended programme as the GC will likely want to keep all options open in case economic or market conditions deteriorate in the meantime.
- Deutsche Bank – Now expect a larger reduction in the pace of QE – from EUR 60bln to EUR 30bln (not EUR 40bln). To compensate, expect (i) a longer extension of QE – nine months rather than six months – (ii) a commitment to not changing the sequencing of exit and (iii) the introduction of conditionality into the definition of “well past” within the rates guidance.
- HSBC – Expect six months of asset purchases at a reduced pace of EUR 40bln per month to start in January. Although, it is hard to have huge conviction given the near infinite possibilities. Do not think the ECB will set an end-date for purchases given concerns that underlying inflation pressures are still insufficient.
- UBS – Expect the ECB will cut its monthly asset purchases from EUR 60bln to EUR 30bln as of January, with a commitment for nine months, i.e., until end-September 2018. UBS think the ECB will leave open whether it will extend QE after September and hint that this decision will be taken in a data- dependent fashion, closer to the time.
In addition to the early mention of this major event coming and the fact that volatility should increase in general, we were also rather specific a day ago with this comment: “At this point, I’ve already noticed that the media is noting the fact that this might signal an end to the rally, and perhaps the beginning of a strong decline. While I think that these things might be true, it is crucial to note that for the moment it seems more likely that we are at a new consolidation area where a new all time high for the market is not likely to be made for a while. Put differently, things might be taking a breather.”
We certainly hope that all of it helped you prepare the what changes may lie ahead.
The Japanese stock market received a significant boost after Prime Minister Shinzo Abe was re-elected to lead the country. This should be expected, since Abe’s economic policy for Japan included massive central bank stimulus, including doubling the money supply and eventually leading to the Bank of Japan adopting negative interest rates. And for those who aren’t aware, a negative interest rate essentially means that the BORROWER receives interest for borrowing money. The point of doing this is to discourage people from depositing money in banks, since they would be charged for the deposit rather than receive interest. Simply put, this policy turns the entire history of finance upside down, and it has become the new normal in some parts of the world, including Europe and Asia.
The Nikkei 225, which is the Japanese equivalent of the S&P 500, ended a 16 day winning streak today, after climbing before and then after the October 22 Japanese election. The fact that Abe is still in charge of the country means that Japan is most likely to continue its current economic policies, which are intended to create inflation and economic growth. However, with the Nikkei at 21,800, this if far from the all-time high set by the index in 1989 (which was 38,916). Since the peak in 1989, Japan’s stock market and it’s economy of struggled against persistent deflation. While the recent rally in the Nikkei seems to be pointing to an eventual return to those all-time highs, it is long way to that destination, and seeing how massive was the stimulation necessary to create this rally, it seems more than reasonable to ask just how it will be possible for Abe’s monetary policies to ever achieve the goal of getting Japan out of its near 30 year economic rut. We will find out soon, but I wouldn’t get your hopes up.
While the “Trump Trade” has been the story of the last 11 months, and although the markets show few signs of considerable stress, it seems that clouds are beginning to form around the otherwise calm environment in the equity indexes. On Monday, we saw one of the relatively few down days in the market that have occurred recently. The S&P 500 declined -0.40%, a figure that before the current low volatility rally would have been considered as a mild decline. But in the present context, it stands out sharply against a backdrop of consistent incremental increases in the markets, day after day.
At this point, I’ve already noticed that the media is noting the fact that this might signal an end to the rally, and perhaps the beginning of a strong decline. While I think that these things might be true, it is crucial to note that for the moment it seems more likely that we are at a new consolidation area where a new all time high for the market is not likely to be made for a while. Put differently, things might be taking a breather.
The primary stress that I see is again with respect to legislative action. If the regulatory environment does not become more business friendly, and if tax reform is not forthcoming, then the markets will almost certainly shed most (if not all) on the gains of the last 11 months. Corporate debt defaults are down from the recent highs we saw in 2016 (the highest we had seen since the financial crisis), but these could rise as a side effect of the Federal Reserve unwinding its balance sheet of treasuries, a move which should push debt servicing costs higher due to rising interest rates. Since the FOMC created an environment of massive borrowing by corporations through its quantitative easing policies, we can expect companies to fall closer to default on their debts unless growth continues to pick up the pace. Therefore, all eyes in the market are on the US government to see what they can accomplish in the nearterm. For now, it’s a waiting game.
This coming Thursday will have a great deal of traders sitting nervously by their computers. They will all be wondering “What will the ECB do and what will Draghi say?” The European Central Bank will meet on the 26th to actually discuss their own version of QE Tapering.
The main predictions as of today are for a large slash in its current bond buying from to go from €60BN per month to €30BN per month and last another 3 quarters. When this time period is over, the ECBs balance sheet is expected to have swelled to €2.5 trillion.
Bloomberg wrote a good piece on this: “such an outcome for quantitative easing would soothe the concerns of policymakers who want a definite signal that the program will end, while giving succor to those who want to keep stimulus flowing as long as the inflation outlook remains lackluster. It doesn’t resolve the question of what happens in a year if consumer-price growth still isn’t on track to the ECB’s goal.”
Then added: “The Governing Council seems concerned that a more aggressive tapering plan could harm financial conditions, especially by letting the euro appreciate even more,” said Kristian Toedtmann, an economist at DekaBank in Frankfurt. “It seems that the hawks want a definitive end-date while the doves want it open-ended,” Alan McQuaid, an economist at an economist at Merrion Capital in Dublin. “I think we will get a compromise, with the ECB saying that it intends to end its QE scheme in September 2018, but if things take a dramatic turn for the worse on the economic or inflation front in the meantime, it will extend its scheme further until things have stabilized.”
This will be a very important day indeed, as seemingly unending QE may be cleaved in half, with an actual end date. If this is true, and the with the US already hiking interest rates, volatility should increase. On the other hand, however, with the strife in Catalonia and now two regions in Italy contemplating succession, this could provide cover for Draghi and the ECB do actually do less than what is currently expected.
On this date, 30 years ago, the stock market crashed and was thereafter known as Black Monday. On 10-20-87, the Dow collapsed -22.61%. Because Thursday shared the same date, and because – suddenly – there was added volatility in the S&P500, many people on financial television were wondering if there would be another crash today.
The idea is laughable, since the global central bankers are rigging the markets to go higher forever, and that wasn’t the case in 1929, 1987, 2000, and 2008.
Perhaps there’s more to it though? After all, the chart below shows an eerily-close price pattern between 1987 and now, with today’s prices on the would-be precipice.
Due to the aforementioned global rigging of the stock markets, there would need to be something huge and truly scary to knock this market lower to resemble anything like the 1987 crash. Like a war. But don’t worry, after a day or two of a scary slide, the market would remember that the central planners “will do whatever it takes” (Mario Draghi) to make the market go up.
Economic reports are usually scheduled to be released in the morning; however, some will be released at 2pm ET. If the report is important enough, like the end of a 2-day FOMC meeting, the afternoon report can be a major market mover. Wednesday had an afternoon Fed report scheduled to be released and traders across the country were hoping that it could breathe some life (volatility) into the market.
That didn’t happen.
A summary of the Beige Book was released at 2pm ET.
Overall Economic Activity
Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate. The Richmond, Atlanta, and Dallas Districts reported major disruptions from Hurricanes Harvey and Irma in some areas and sectors, including transportation, energy, and agriculture. Manufacturing activity and nonfinancial services expanded modestly to moderately in most Districts. Retail spending rose slowly, while vehicle sales and tourism increased in most Districts. Residential construction continued to increase, and growth in commercial construction was up slightly on balance. Low home inventory levels continued to constrain residential sales in many areas, while nonresidential real estate activity increased slightly overall. Loan demand was generally stable to modestly higher. Growth in the energy sector eased slightly. Agricultural conditions were mixed; while some regions were reporting better-than-expected harvests, low commodity prices continued to weigh down farm incomes.
Employment and Wages
Employment growth was modest on balance, with most Districts reporting flat to moderate increases. Labor markets were widely described as tight. Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled manufacturing, and some health care and service positions. These shortages were also restraining business growth. Firms in several Districts reported that scarcity of labor, particularly related to construction, would be exacerbated by hurricane recovery efforts. Despite widespread labor tightness, the majority of Districts reported only modest to moderate wage pressures. However, some Districts reported stronger wage pressures in certain sectors, including transportation and construction. Growing use of sign-on bonuses, overtime, and other nonwage efforts to attract and retain workers were also reported.
Price pressures remained modest since the previous report. Several Districts noted increased manufacturing input costs, but in most cases these weren’t passed through to selling prices. Retail prices generally increased slightly. Transportation, energy, and construction materials prices increased more rapidly, with some Districts citing effects from hurricanes.
This report was ignored in favor of more of the same: nothing. Nothing much happened in the equity indices Wednesday, with another day of miserably low volume.
The US equities markets have been clearly bullish since the election of President Trump, as he has been rife to point out. However, although the financial markets clearly are anticipating passage of pro-business policies, including a lower corporate tax rate, there are other factors which have helped support the markets. Both of these are tied to quantitative easing.
When quantitative easing finally ended in late 2014, the markets clearly began to falter as the momentum they had enjoyed since bottoming in 2009 began to taper off. The years 2015 and 2016 mostly saw flat performances for the equity indexes, with summer 2015 marked by strong volatility and sharp declines due primarily to market uncertainties in China. But China’s situation aside, the main reason for the slowdown in the markets at that time was the end of easy credit and zero interest rate policy from the Federal Reserve, which had encouraged companies to buyback shares as well and binge on mergers and buyouts as corporate leaders sought to increase share value and inflate EPS figures by reducing the number of shares in the open market. This ploy helped to inflate the market despite stagnant GDP which averaged roughly 3.33% per year between 2009 and 2016. In other words, companies showed on paper greater earnings per share and higher stock prices despite no significant (if at all) improvements in actual productivity or sheer profitability. It was even noted that many companies paid more towards stock buybacks than they actually generated in profits, with a good number of companies borrowing at near zero interest in order to buy back their own shares, a practice known as a leveraged buyback.
But in the end, all that this did was create a false impression of economic growth. The economy was not improving much beyond where it was within one year after the start of the Great Recession. However, since the election of President Trump, GDP has surged surprisingly, clocking in nearly 3.7% over the first half of 2017. If this continues, we could see GDP pass 6% for 2017, a feat that we haven’t seen since the best years of the last decade, or since the bull market of the 1980s and 1990s. Mergers and acquisitions, as well as stock buybacks, have fallen sharply as companies clearly are moving into expansionary mode and hiring more workers as others have continued to move back into the United States due to rising wages abroad. However, unless Congress passes legislation that will sustain this environment and deliver on market expectations for a pro-business environment, the current rally is likely to stall and sharply retrace as there is not QE to support it. We’ll monitor legislative progress closely to see if things begin to move forward.
Emmanuel Macron has been a topic of mine since just before his election. As you may recall, I mentioned yesterday how his rise to power was greatly assisted by timely endorsements from other world leaders, including former president Obama, as well as positive coverage from the european press. Now that he is in office, I’ve noted his clear drive to steer the European Union in the direction of making a more pro-business environment, with particular focus on labour reforms and Brexit negotiations in this regard. He has also joined some of his EU counterparts in pivoting towards a tougher stance on illegal immigration, in an obvious attempt to shore up support of a european public who has clearly been less than pleased by the recent large influx of economic migrants into the region.
Macron spoke with Theresa may this week to discuss Brexit negotiations. May appealed to Macron to to broaden negotiations on the matter, in particular appealing to him to help in negotiating a transitional period for Brexit. May had appealed to other EU leaders including Angela Merkel of Germany on this matter, but has reportedly failed to gain a sympathetic ear so far. With Macron’s growing status in the EU, this move by May serves as perhaps her last hope to achieve her goal of establishing a transitional period, seeing that most observers to the matter have all but concluded that the matter is essentially closed. Macron also is pushing for the EU to take a tougher stance on free trade negotiations, highlighting his pivot towards establishing some degree of protectionist policies for French agriculture. Overall, as I stated yesterday, I expect these moves to be favorable for european business, and we will keep an eye on Brexit negotiations to see how they play out.
Emmanuel Macron has continued to enrage workers as well as the far-left and right political wings of French politics as he presses on with his labour agenda. During his campaign, Macron presented himself as an alternative to traditional politics, arguing that his approach represented a new political ideal. The French media immediately rallied to his side as the comparably far-right candidate Marine Le Pen pushed for a much more conservative France, particular with regard to mass immigration policy and a reduction in French involvement in the European Union, including a potential withdrawal from the EU altogether. The idea of a withdrawal from the EU caused political, business and media forces to unite in a push to assure Le Pen’s defeat, clearly favoring Macron. To this end, Macron easily won the election.
However, now that he is in office, the French public and press appear to realize that he is not the candidate they believed him to be. Although he is still pro-European Union and focused on continuing to increase French commitment to the EU, it now seems that the public finally understands what this actually looks like in reality. The concerns voiced by other candidates during the previous election, including Le Pen, regarding the erosion of national sovereignty and its threats to the working class in France now seem apparent to the public as Macron and his majority party are able to sweep through legislation, particularly with regards to labour reform. Macron seems committed to labour reforms that explicitly benefit larger companies by making it easier for them to fire employees, give them greater power to negotiate wages, and allow them lower barriers to hiring new employees by lower qualification standards. While these things in and of themselves are not necessarily bad, they appear to be implemented in a such as way as to not simply rebalance potential inefficiencies, but rather to give companies more power over their workers. To this end, protests continue against Macron’s legislation, but his control over the government by means of his majority party has allowed him to pass legislation quickly.
In the end, Macron may become the new standard of European politics, showing pro-EU leaders an apparently more efficient way to achieve their goals. We can expect other politicians to follow his lead in the near future. While I believe his reforms will certainly benefit investors, it will also deepen divisions between workers and government in France and Europe as a whole. It remains to be seen what the aftermath will be.
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