By Dean Popplewell
Today the various global asset classes are consolidating after a good run up late last week. Now that the ECB has unveiled its “unclear” bond buying plan to address euro periphery debt stress issues, the focus has shifted to helicopter Ben and his cohorts. The market overwhelming believes that the Fed will introduce new stimulus measures after their two day meeting this week. Last month's softer than expected payroll report has increased investors' hopes that some easing measures will at least be applied this week, although if Ben happens to disappoint, there will be, for sure, a large pullback in the market. A seasoned veteran would have expected the market to already have priced in both the German constitutional outcome tomorrow and an easing Fed by now, however the market and more so hot-money, are continuing to apply pressure on the mostly weaker shorts.
The ECB’s new bond-buying plans is allowing a host of euro companies, including Spanish and Italian banks and utilities, to launch new debt issues this week. So far it’s turning into one of the busiest periods for fixed income dealers this year. Euro policymakers' primary move is achieving its objective and breaking down corporate borrowing barriers. However, investors should continue to trade cautiously as it remains to be a bumpy-road-ahead, with Draghi seen as the White Knight to the rescue is giving “activity a fillip.”
For an issuer, it's the right time to come to market, especially as the markets were largely shut or ceased to trade over the summer as sovereign fears were building and uncertainty persisted over whether Draghi could pull off a coup. Event risks remain with the German court's ruling on the ESM tomorrow and the ongoing IMF/Greek negotiations. What the ECB is achieving is some stability or perception thereof; while investors can still reap larger yield premiums to buy deals from Spain and Italy. This certainly looks good in a low yielding environment, but beware!
New released data is thin on the ground this morning. In the U.K., its trade goods deficit fell to its smallest size in a year and a half in July as exports to countries outside EU hit new record highs. The deficit narrowed to -GBP7.1b in July from -GBP10.1b in June. Prime Minister Cameron should be pleased that, at least perception wise, his government’s strategy to isolate the U.K. from mainland euro mayhem could be said that it was working as they tighten ties with other fast-growing countries outside the EUR framework. Analysts had been expecting a narrowing to -GBP8.9b, so the surprise increase in goods exports happened to be the biggest monthly rise on record or an +11% increase to non-EU countries.
According to a mix of positioning data (including our own above) this market is predominately short the single currency or EURs and long the commodity currencies ahead of the FOMC decision on Thursday. The market should expect this to change ever so slightly. Speculators, weaker shorts or hot-money, whatever you want to call them, will want to be prudent and reduce these net positions. Even more so now that Draghi promises to eliminate “tail risk” by bond buying. Specific "long" the commodity positions (AUD and NZD) have or are being pared on the back of regional economic slowdown in China, despite the IMF calling for a soft landing. Investors seem to be transferring most of the down-under commodity interest towards the loonie, which is happily printing new yearly highs.
Already Swiss private bank selling interest has easily been absorbed around 1.2790. Even Dutch AAA names, known SNB recyclers, have been on the EUR/AUD offer, a cross that the SNB took specific interest in last month. Despite all these EUR’s to go from directional sellers, the single unit is remarkably bid. Corporations remain the only notable buyers, other than the regular fast money accounts. The 1.2825 barriers remain this morning's pivotal point, above here opens a gate way of stop-losses. Despite being short, the retail sector is telling us they are willing sellers of the single unit on upticks.