It's the oldest trick in the policymakers' manual: Under-promise, over-deliver. In fairness, Super Mario never really under-promised; Wednesday's 50b per month leak certainly suggested a program that was larger than the prevailing consensus. But by comfortably exceeding that figure just 24 hours later and laying out a roadmap for at least 18 months' of purchases, Mario Draghi once again demonstrated that he is not to be trifled with.
To be sure, the Germans got their wish and segregated the vast bulk of the buying from the ECB's balance sheet; Macro Man couldn't help but notice Draghi's mention that the Bundesbank were the beneficiaries of full risk sharing (had it been required) in the depths of the maelstrom in 2008. Whether this was a subtle dig or a history lesson is unclear; perhaps it was a little of both.
Regardless, it was a fairly assured performance from the ECB President, and when Mr. Draghi is assured, he normally gets what he wants. So it was yesterday; although the euro took a little while to make up its mind, by the end of the day the sellers poured in, the buyers backed off, and the SNB no doubt congratulated themselves on how little they managed to lose on their 175 billion of euro denominated assets (or B.)
Looking at a monthly chart, there appears to be quite a bit of fresh air below current levels in EUR/USD.
While nothing moves forever in a straight line, of course, it certainly doesn't feel as if euro weakness has gone tabloid, as the Dollar Going Down Forever was wont to do quite frequently over the last decade and a half. EGDF might well become over-crowded, but that will likely require more time and lower prices.
As for equities, they were all swept up by the excitement on Thursday; one can easily imagine European equity managers chairing Signor Draghi out of the village square, as the SX5E reached a post-crisis high. That having been said, liquidity can only carry you so far in the absence of any discernible demand; everything you need to know about European equities is probably summarized in the chart below of the IBEX and DAX; no promises for guessing which is which.
And fixed income? Let's just say that when you can be long 10 year UST versus BTPs and pick up 30 bps of positive carry, you're supposed to do that until your (appendage of your choice) falls off, aren't you? The ECB hasn't even bought bonds yet, and those BTPs are yielding roughly 10 bps above the all time low in Treasuries.
No wonder the SNB wanted no part of buying any more.....
To be sure, the Germans got their wish and segregated the vast bulk of the buying from the ECB's balance sheet; Macro Man couldn't help but notice Draghi's mention that the Bundesbank were the beneficiaries of full risk sharing (had it been required) in the depths of the maelstrom in 2008. Whether this was a subtle dig or a history lesson is unclear; perhaps it was a little of both.
Regardless, it was a fairly assured performance from the ECB President, and when Mr. Draghi is assured, he normally gets what he wants. So it was yesterday; although the euro took a little while to make up its mind, by the end of the day the sellers poured in, the buyers backed off, and the SNB no doubt congratulated themselves on how little they managed to lose on their 175 billion of euro denominated assets (or B.)
Looking at a monthly chart, there appears to be quite a bit of fresh air below current levels in EUR/USD.
While nothing moves forever in a straight line, of course, it certainly doesn't feel as if euro weakness has gone tabloid, as the Dollar Going Down Forever was wont to do quite frequently over the last decade and a half. EGDF might well become over-crowded, but that will likely require more time and lower prices.
As for equities, they were all swept up by the excitement on Thursday; one can easily imagine European equity managers chairing Signor Draghi out of the village square, as the SX5E reached a post-crisis high. That having been said, liquidity can only carry you so far in the absence of any discernible demand; everything you need to know about European equities is probably summarized in the chart below of the IBEX and DAX; no promises for guessing which is which.
And fixed income? Let's just say that when you can be long 10 year UST versus BTPs and pick up 30 bps of positive carry, you're supposed to do that until your (appendage of your choice) falls off, aren't you? The ECB hasn't even bought bonds yet, and those BTPs are yielding roughly 10 bps above the all time low in Treasuries.
No wonder the SNB wanted no part of buying any more.....
14 comments:
Sovereign QE and cyclically improving growth does not equate to low yields and a weak currency in the Eurozone. It won't be that easy for Mr. Draghi. Indeed let us add the tally shall we.
- Low oil prices boosting real incomes
- Weak euro boosting earnings
- Sovereign QE
- Leading indicators turning up BEFORE the ECB got on board.
You put that into your little macro blender and suddenly the Eurozone is growing 2% this year all the while the ECB will unleashing euros into the system every single month. I can understand that you think the Eurozone is structurally doomed (I would even agree), but this ain't the time to throw your chips in on this theme I think.
The whole situation is a perfect mirror image of 2007/08 where global central banks hiked us into the stone age as oil soared. My base case is that we are now entering the silly season part of the cycle. My family members are already talking about their stock portfolios this year (true story!) and I think the postman and cab driver will start talking about his long IBEX futures very soon.
This isn't the end, but it might be the beginning of the beginning of the end ... or something like that.
I am a big fan of stock market models that place a large weighting on earnings growth. So far EZ equities havent seen much of any earnings growth over the past few years, hence the underperformance. I think to keep the rally going lots of emphasis will be placed on Q1 results and probably more on "H2". I am not as familiar with EZ earnings but for quite a few companies I watch they dont do quarterly just H1 & H2, though I am assuming all the big ones do quarterly. US forward earnings actually seemed to have topped out a little here http://imgur.com/RgWjZGJ
US earnings up 30% from 2007 and almost consistently upwards since 2010. EZ earnings at 60% of 2007 levels and peaked in mid 2011
Thank god, then, that QE mainly "works" through multiple expansion ... we hope. Now on Eurozone GDP, let me specify my assumptions. The trend in the eurozone, on a good day with an optimistic economist, is somewhere between 0.8-1.0% annualised. Right now, any reasonable bottom-up forecast will yield about 1.2% annualised (0.3% q/q in q4), and so you add a dollop of all the factors I talk about ... maybe not 2.0%, but 1.5 or 1.7 even?
Stranger things have happened, but it will all down to Germany as per usual. But if Germany has a little investment cycle here or France just manages to go from horrific to bad, it could happen.
I'm thinking of this in terms of what's more likely,GDP surprises to the upside ,or surprises to the downside? Coming from the awful place they are I think I would rather be positioned for the former than the latter.
State Street PriceStats Inflation Series United States
http://imgur.com/hGRsoTy
Other problem is, this puts Kuroda-san in a bit of a pickle, because his kamikaze yen weakening plot just got side-swiped (to quote MM's phrase) by EURJPY. This guy won't be allowed to jump off the building in peace without Draghi's fine italian crafted rope slowly dragging him back into the room through the shattered glass...
or in other words, can their export brio compensate the stagnating population/domestic consumption
@Washed: You are absolutely right. Before 2009 and following the super-stimulus administered by the PBOC as a result of the crisis, Germany enjoyed export growth rates of 30-40% y/y to China. Part of this of course was base effects as well, but the key point. Those growth rates are not coming back. But there is a twist in this tale, and it is important. The UK and the US have taken over as drivers of Eurozone exports since 2011. Indeed, the real(!) story here is the UK. The Eurozone now runs a larger bilateral nominal trade surplus with the UK than it does with US! Adjust for the relative sizes of the economies and that is pretty amazing! What does it mean for investors, well the Eurozone will be very sensitive to UK demand this year, but EURGBP will help here obviously. Incidentally, when the flows reverse, expect the EURGBP to go higher, fast!
@ Nico: Well I think you just hit the bulls eye there. But what happens when rapidly ageing economies, short on domestic demand and with external surpluses, have negative interest rates and starts running QE?! This will be/is the mother of all carry trades. It also indicates that export dependency coupled with the need for very loose monetary policy is essentially an externality to global financial markets. QE creates inflation alright, but in all the wrong places. Now, I am not about to exonerate Bernanke for his little Savings Glut proposition trying to hide the policy mistake at the Fed. But in a rapidly ageing world, it becomes relevant to, at least, consider that too much fiat money end up chasing too little yield.