ECB Walks Back Further From Hawkishness

Originally published by AxiTrader

Good Morning everyone,

This will be my last note until July 24 as I’ll be away from my desk on a little surfing holiday with the family over the next couple of weeks.

It’s summer in the Northern hemisphere, that time when senior traders leave their desks and the less experienced have the Con. Usually these more junior traders and portfolio managers want to do little to rock the boat. But often the next little while is a time of trouble.

So good luck.

Here’s hoping the volatility expansion waits until I get back though.

Cheers,

Greg.

Now to the important stuff

With the absence of US markets it has been a fairly quiet night across global markets. That’s not to say that nothing happened.

Stocks in Europe dropped a little after the previous day's super charged rally, bond rates dipped a little, and the US dollar stayed strong.

After yesterday’s RBA induced sell off the Australian dollar found support below 76 cents while the euro held it relatively well even as the ECB continued to push the cash for continued accommodation as it tries to walk the market back from the hawkish take of president Draghi’s recent speech.

Gold is still becalmed and needs to hold the recent range low. It’s strange it has caught a better bid given the latest North Korean missile launch is potentially a game changer. Oil too was calm, and copper has run into technical resistance.

Nothing much of note on the calendar here in Australia today but there is a raft of services PMI’s out across the globe.

• The US has requested a closed door session of the UN Security Council to discuss the latest North Korean Missile test. You’ll recall that the May test was seen as a significant progression in DPRK technology. So the fact that yesterday’s July 4 celebratory launch was claimed to be an ICBM by the hermit kingdom is a big deal for global geo-politics. That much is evidenced by the fact it flew 900 kms and splash in Japanese waters. But possibly more telling is that China AND Russia – who has recently been stirring the pot a little on this issue – both came out against the launch. Not sure what the heck Kim Jong-Un is up to. But his actions are getting too close for comfort and the chances of some sort of US lead retaliation have grown it would seem to me. Buy gold?

• The ECB continued to try to walk back the market and traders from the hawkish take they'd made after president Marino Draghi's speech last week. Chief Economist Peter Praet said that the EU recovery is essentially predicated on the current policy settings continuing. "The baseline scenario for future inflation remains crucially contingent on very easy financing conditions which, to a large extent, depend on the current accommodative monetary policy stance," he said.

• Across the Channel however Ian McCafferty, one of the BoE’s MPC members who voted for a hike at the last meeting, told a newspaper rates in the UK need to rise. "I feel on the balance of monetary policy that there is a need for change," McCafferty told the Daily Post adding "I think this would be justified and would be the prudent thing to do at this stage."

• And while I’m in Britain it’s worth noting that another data point was weaker than expected overnight. The Markit/CIPS construction PMI printed 54.8 against expectations of a 55 print. Coming after this weeks Mfg PMI of 54.3 (56.3 expected) it’s another sign that maybe the pound's weakness isn’t a cure all.

• Not to be outdone the Canadian central bank governor again warned rates will soon rise. BoC governor Stephen Poloz told German newspaper Handeblatt (exactly why do these central bank governors give scoops to foreign newspapers) that rates need to be set pre-emptively. “If we only watched inflation and reacted to inflation, we would never reach our inflation target, we'd always be two years behind in the reaction," he said. "So we have to look at the rest of our indicators in the models that predict inflation," he added to cheers of Janet Yellen and most of her colleagues at the Fed.

• And last, but not least, Sweden's Riksbank said last night there is little chance of another rate cut and more monetary stimulus. But it's not in a rush to hike either. EUR/SEK rallied hard and finished mid range on the day at 9.666.

• The oldest bank in the world is safe. The EU has cleared Italy’s bailout of Monte Paschi.

• China’s central bank yesterday said it will maintain prudent monetary policy. But it also said the economy faces risks and that the shadow banking system still needs to be reined in with stronger risk controls

• LORD! What a day we saw of gains on the S&P/ASX 200 yesterday with the index up 99 points, 1.75%, to 5,783. It’s a continuation of these wild price swings we’ve seen in the local market that must be driving traders and portfolio managers crazy. I’ll leave individual company valuations to others. But as a macro guy it seems to me that the battle going on the ASX is the same one which has suggested to me that international investors have moved on from Australia to better climes recently. That it the battle is over the outlook for the Australian economy, the outlook for the global economy, and thus the possible opportunities and threats that will assail the two handfuls of companies which so dominate the market capitalisation of the index.

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• Something to watch while I’m away, it has been a wild ride for the local market. A time of big moves in stock and index valuations at a time when other markets have been far more stable. Wild swings like these undermine the confidence of traders. But even this rudimentary chart shows there is some solid support between 5,665 and 5,785. As long as this level holds the ASX 200 could be building a base for a run higher once again. A break would be decisive however.

• Naturally yesterday with the apparent defeat of the SA bank tax it was financials that drove thee gains on the index. But this was also a broad based rally with the miners, and retailers joining in for the ride. In no small measure that’s because of the economic data. As I’ve written often over the past month or so the Australian data flow has remained strong both in relative terms and certainly much stronger than the jaundice expectations that myself and many others held a month or two back.

• Yesterday’s retail sales beat with the stonkingly solid 0.6% rise coming on top of the previous month’s 1% rise really but paid to the worries many of us have held about consumers. But it’s not just the headline beat, it’s where retails sales were concentrated – discretionary spending looks like it’s back – and it’s how this data combines with other data in the economy right now. My tweet from yesterday sums it up pretty well I think.

• That’s a nice place to look at what the RBA had to say yesterday. I found the governors statement utterly neutral. I was a little surprised he didn’t nod to the improved jobs data recently. But I also would bet that was the crucial omission that saw traders read his statement as dovish. He likely crafted it with a neutral bias and left this out so as not to convey any hint of an upward rate trajectory knowing the import of that for the Australian dollar. He succeeded and the Aussie is back at 76 cents not cruising atop 77.

• The takeaway is that we have a central bank that believes the economy is picking up toward its forecasts. We have a central bank that retains a confidence in those forecasts and the global backdrop. But we also have a central bank that knows there is still plenty of slack in the jobs market and that households are holding plenty of debt. Australia is not Europe, the UK, Sweden, or Japan. But the RBA is likely happy to let the rabbit run a little until it sees more evidence the transition it expects is actually materialising.