This is a tribute to Curtis Mayfield and the Chambers Brothers who recorded the song and made it popular. The TRAIN THAT IS COMING IS THE ENGINE OF VOLATILITY. Tomorrow is the ECB meeting and the regularly scheduled press conference 45 minutes later at 7:30 CST in which ECB President Draghi will use nuance to explain the central bank’s decision. Currently, the market is expecting some type of action by the bank because it seems that the Germans have acquiesced to some type of ECB quantitative easing scenario. When the ECB announces its decision at 6:45 a.m., a statement that leaves policy unchanged will result in the EURO rallying against all major currencies for, based on the Bundesbank’s statement last week, the market is anticipating at least a modest cut in the refi rate of maybe 10 basis points.
A larger move by the ECB would be if it took its interest on reserve rates into NEGATIVE TERRITORY. Negative rates would be a major policy sign that the ECB is very worried about deflation in the eurozone. And an actual BOND BUYING PROGRAM would be deemed an aggressive action and the EURO would drop. IF THE ECB DOES NOTHING THE EURO WILL RALLY BECAUSE OF THE ANTICIPATION FOR ACTION, but trade cautiously as Mario Draghi seems to enjoy creating volatility through staged nuance at the press conference.
Why do I believe that the volatility train is coming?I will highlight some major areas of concern and will address them in the near future:
- The BOJ and the Abe government have gone to great lengths to create a recovery in Japan and with it a modicum of inflation. At this point economic growth in Japan is stalling. With the initiation of the sales tax increase of 3 percent April 1, Japan’s central bank has a great deal at stake. If growth stalls the BOJ will be hard-pressed for even more radical efforts to jump-start the economy through increased bond purchases both of a domestic and foreign nature. The YEN will be under pressure causing stress throughout the global financial system.
- What will happen in China as it tries to stem any debt crisis from too much credit being advanced through the Chinese shadow banking system?
- The problems in the Eurasian land mass as President Putin attempts to undermine the sanction regime of the G7 nations
- The potential for a banking crisis in the European system as the mass of debt becomes a larger burden in a low inflation environment. Compounding the problem is that European banks own a vast amount of sovereign debt of Greece, Spain, Italy, Ireland and Spain,resulting in an adverse feedback loop of monstrous proportions; and
- The Federal Reserve has adopted a position of primary concern for a high unemployment/low wage environment and is pretending that a zero interest rate policy can provide the solution. The FED is putting its credibility on the line in pursuing a jobs-at-all-cost position for if the self-imposed jobs threshold can be easily forsaken, why should investors believe that the inflation threshold will be followed? Keep an eye on the 2/10 yield curve for any signs of the market’s concern with regards to the credibility of the Yellen Fed. For now, the SPOOS and NASDAQ are the default mechanism for all investors for when in doubt, buy equities. As Jefferies’ David Zeros said on CNBC Monday afternoon, SPOOS ARE FOR LOVERS AND GOLD IS FOR HATERS, which may well be … for now. But being short volatility is for the clinically insane. Just hope I have a ticket on the volatility train since “YOU DON’T NEED NO BAGGAGE, JUST GET ON BOARD.”