Notes From Underground: On Thursday the Three Ring Circus Comes to Town

Quick Hitter: Thursday brings the interest announcements of three central banks. The Swedish RIKSBANK, THE BANK OF ENGLAND, and, of course, the ECB. The most important event will be the ECB press conference at 7:30 a.m. CST where President Mario Draghi will face the financial media and be pressed to provide some insight into the ECB’S plan going forward about BOND PURCHASES OR SOME VARIATION ON THAT THEME.

First, the RIKSBANK will probably cut rates from 1.5% to 1.25% as the Swedish economy is beginning to slow because of the recent appreciation of the KRONA. The Swedish currency has been a recipient of haven funds and the strong currency is beginning to be a drag on exports. Inflation in Sweden is low so the RIKSBANK has flexibility and a rate cut is well within reason. Also, as in Australia, the 2/10 YIELD CURVE in SWEDEN is fairly flat at 61 basis points, yet another reason why the central bank has ROOM TO MOVE.

Second, the BOE announces its decision at 6 a.m. CST and the consensus is for no change from the 0.50% rate and for no increase in the 375 BILLION POUND ASSET PURCHASE FACILITY. The British economy has definitely shown weak economic data but it is doubtful that Mervyn King would want to move at this time with all the problems confronting Draghi and the ECB. I have to agree with CONSENSUS and believe it will be steady on the monetary throttle.

Third, the ECB will announce its rate decision at 6:45 a.m. CST and it seems that a cut of 25 basis points is possible as last month the ECB lowered its rate on BANK RESERVES TO ZERO so taking the overnight rate down to 0.50% would be rather insignificant. Mario Draghi has spent the last three days floating TRIAL BALLOONS about possible ECB actions in regard to BOND PURCHASES, which is a much more significant matter. If Draghi listens to markets–and it seems that he does–the ECB will enter into a third type of LTRO program and plan to buy SOVEREIGN DEBT OF UP TO THREE YEAR DURATION. It seems that Draghi got the most favorable market reaction from that trial balloon and it also seems to be a bow to German demands about not doing open-ended BOND PURCHASES. Adding to the importance of tomorrow’s meeting, ECOFIN Chairman Jean Claude JUNCKER will be in attendance. This is important for the conspiratorialists but it should be noted that the ECOFIN CHAIRMAN has a standing invitation to attend ECB meetings as an observer.

This time his presence may be to explain to the ECB what the policy makers in the EU will be comfortable with as far as any BOND PURCHASING PROGRAM. Again, the ECB press conference may be the more telling event of the morning so let the headline driven ALGOS do their work before committing to any one view. There will be a lot to digest and the media is desirous of creating a story regardless of facts. As we saw from Bernanke’s speech at Jackson Hole, key word, headline-driven ALGOS are devoid of perspective so don’t try to be the first to the WATERING HOLE (reference Victor Niederhoffer). Be prepared with support and resistance levels on the EURO CURRENCY for the action can rapidly be two-way because of so many short positions.

A large liquidity add via debt purchases can prove to be short-term positive while medium term very negative. The BUNDS and ITALIAN BTPs will certainly be important indicators. If the BUNDS begin to get sold while the other SOVEREIGN DEBT instruments hold or rally–that may well be the best key. Caution is the watchword and don’t rush to JUDGMENT.


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One Response to “Notes From Underground: On Thursday the Three Ring Circus Comes to Town”

  1. Joe Says:

    “headline-driven ALGOS are devoid of perspective so don’t try to be the first to the WATERING HOLE ” Sound advice on headline events, whatever market one treads these days.

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