Thursday in Europe the ECB meets to announce its decision on interest rates. The unanimous consensus is for the ECB to hold rates at 1%. This is probably correct for Draghi will not want to be seen as possibly aiding Sarkozy. The reports out of France tonight are that Mr. Hollande more than held his own against President Sarkozy in the only televised debate of the campaign. Thus, with four days to the election the ECB will lay low. If Draghi, though, is familiar with the Wizard of Oz, he would do well to ask for the necessary elements of decisive action.
Monday night, Governor Stevens of the RBA cut interest rates by 50 basis points, ignoring consensus and adjusting AUSSIE INTEREST RATES to where the market had already priced them through a very inverted short end of the curve. In EUROPE THE MARKET HAS ALREADY PRICED IN A JUNE CUT AS JUNE EURIBOR IS ALREADY AT A YIELD of 59 BASIS POINTS (FUTURES@.9941). President Draghi could gather the BRAINS, HEART and COURAGE TO OFFICIALLY DO WHAT THE MARKET HAS DONE FOR HIM. A CUT BY THE ECB WOULD SHOW THAT DRAGHI WAS INDEPENDENT OF THE LIONS OF AUSTERITY. If the peripheries are to gain any traction on the growth issue it is important to exhibit some COURAGE in doing all to help create the possibility of growth.
A surprise cut would put some new downward pressure on the EURO, though the softening European economies could use a little help from a weakening currency. Mario Draghi, it doesn’t take much of a BRAIN to measure the negative impact that the imposed austerity budgets are having on several of the peripheries. Now that the Draghi-led ECB has rescinded the Trichet rate rises, it is time for Draghi to have enough HEART and surprise the markets by CUTTING RATES. Unfortunately the elections in France provide an excuse for non-action. Oh well, I guess a proactive ECB is just a dream.
***As noted, the AUSSIE CENTRAL BANK cut 50 basis points the other day and the Aussie 2/10 has now jumped out to 73 basis points. The near term curve is still inverted so another cut is probably in the near future, especially as tax increases are expected. The AUSSIE DOLLAR has held up so far but with another cut in the offing, the role of a carry trade vehicle will be tested. If we thought the currency trade was difficult during the last six months, the lowering of global rates will challenge all those investors who have harvested the low hanging fruit of high interest rate differentials. A slowing U.S. economy will cloud the global investment atmosphere even more.
***A regular theme of this blog has been the impact of ZERO INTEREST RATES on the value of all investable assets. As the S&Ps and other equities hover at recent highs, it is difficult for the BEARS to gain the upper hand. LOOKING BACKWARDS to October of 2007 when the S&Ps made all-time highs, the earnings on the overall index was $85 (roughly 1570/85). Interest rates at the time where 4.75%.
Today, the S&Ps are 1400 and earnings are more than $100 with interest rates at zero. This makes trading so difficult as how do we value assets with zero interest rates the dominant variable driving the sentiment? Bernanke may posture about the PORTFOLIO BALANCE CHANNEL and the WEALTH EFFECT, but this LOOK BACKWARDS reflects the havoc being caused in global finance. Friday: unemployment awaits.