The U.S. jobs report was in line with market expectations colored by the Wednesday release of the ADP data. The market’s response was interesting in that BONDS, STOCKS AND THE DOLLAR reversed some of the reaction to ECB President Mario Draghi’s press conference on Thursday. While the jobs report seemed to SOLIDIFY an FOMC rate hike next week, the settlements on Friday raises questions about the Fed’s current strategy. Even though a rate increase is a “certainty” and with the ECB promising more liquidity at lower interest rates, the settlement prices at the week’s end were perplexing:
1. The U.S. dollar closed 2.5 percent lower on the week with a strong jobs report and the ECB promising more aggressive action on the monetary front;
2. U.S. equity prices closed virtually unchanged so the stocks are convinced that regardless of the DATA, the FED is in one-and-done mode. Giving credence to the one-and-done was the fact that the European and Japanese stock markets closed down for the week even as more liquidity was promised in Europe. The ECB has a great deal of monetary stimulus left for the month so watch for large BOND PURCHASES to power the under-performing European equity markets during the next two weeks;
3. Even in the face of a certain FED HIKE and a supposedly disappointing ECB announcement–which the market understood to mean less liquidity–the GOLD and SILVER performed well, causing end-of-year pain to hedge funds’ massive short positions. The GOLD and SILVER defied market logic and the powerful reversal is something to watch. The GOLD has been sold during the last two years when the EQUITY markets rallied and yields on bonds and short-term interest rates ROSE. But that algorithmic correlation was upset with the powerful precious metals rally on Thursday and Friday.
The breakdown in previous correlations indicate that VOLATILITY will be on the rise as we face the diminished liquidity of holiday markets. Patience will be rewarded as ALGOS become disrupted. Be prepared with technical levels to trade with the lowest risk levels as you will be surprised that prices you only dreamed of will be dancing on your screens.
***IMPORTANT NOTE FROM MARIO DRAGHI’S SPEECH from the Economic Club of New York: Bottom line of the speech was that Mario Draghi had very little to say after his press conference on Thursday and was challenged on the purpose of his SILLY SPEECH by one of the world’s best central bankers, Mervyn King. In a post-speech Q&A, King asked President Draghi if he was merely attempting to walk back the market impact of Thursday ‘s violent reaction to Draghi’s failure to deliver the huge increase in QE. At first Draghi tried to pretend he wasn’t but because it was Mervyn King asking the question, the ECB president had to admit that of course he was an interested party and therefore was trying to diminish some of the market’s adverse reaction. It was a very interesting exchange and shows how Draghi is one of the great PR manipulators who got caught with his NOSE GROWING.
Besides the Mervyn King exchange, Draghi’s speech is pure nonsense. In the opening paragraph, Draghi said: “Growth is strengthening. The output gap is gradually closing, as is the case in the euro area, or in some cases it is closed already. Insofar as monetary policy is intended as macroeconomic stabilization policy, it is succeeding.” This in unadulterated CRAP that only the access media would accept as credible. The unemployment rate across the EU is 10.7% and at a record high in France. With unemployment very high in Spain, Italy, Greece and others THE OUTPUT GAPS BY ANY MEASURE ARE NOT GRADUALLY CLOSING. Further in his speech, Draghi contradicts himself when he said, “and though the euro area unemployment rate is declining–down almost 1.5 percentage points from its 2013 peak–a great deal of slack still remains in the labor markets.”
Output gaps of the magnitude in Europe put pressure on wage growth and absolute levels, and thus on inflation. The lack of price increases in the DEBT-BURDENED European economies means that President Draghi wants to do more to push inflation higher but for the ECB and its leader the Germans may prove the IMMOVABLE OBJECT. Bundesbank President Jens Weidmann prevailed at the December 3 meeting but Draghi will certainly try to attempt to circumvent Weidmann through any means he deems necessary. For in traditional dictatorial systems, the ENDS JUSTIFY THE MEANS. Unfortunately for Draghi, the German taxpayer ends are vastly different from the ends of the debt plagued nations who are saddled with a currency out of their control.
***Today there are regional elections in France. During the first round, the Marine Le Pen-led National Front is expected to poll at least 30 percent. (If there is no outright majority during the first round, a second round will take place next week.) Twelve of the regions are currently in the Socialist Party camp so it could be a major statement about Francois Hollande’s governing ability if the Socialists fail to make it into the second round (and would send shudders throughout the EU governing elite). Le Pen’s policies are a direct assault on the powers that have seen the accretion of national powers to Brussels and the ECB.
The National Front believes that France would be stronger economically with the FRANC. Draghi fears the dissolution of the EURO more than anything (remember July 2012 and his whatever it takes speech). So if the National Front polls stronger than expected today, look for the ECB to utilize its firepower this week to provide a weaker euro and lower bond yields in an effort to support the power elite in France against those to be a threat to the status quo.
***Making life for Draghi even more difficult is that bumbling Prime Minister from the U.K., David Cameron. There was an article in the weekend Financial Times, “UK Call For Multicurrency EU Triggers ECB Alarm.” In an effort to arouse support for Britain in the EU, Cameron is pushing for all types of relief from the rules of the Lisbon Treaty and Maastricht Accord. Cameron wants the U.K. to have the benefits of the Union but not have to bear the costs and legal responsibilities. In particular, the Brits would still like to have the ability to depreciate the POUND against its trading partners as a monetary tool in times of economic stress. In the article the reporters noted: “Eurozone countries won’t want to give a competitive advantage to those outside and will use it as an excuse.”
That is what worries Draghi. David Cameron wants to push to rebrand the EU as a multicurrency union but that of course would play havoc with the sovereign debt of the EU countries. Imagine how the bonds of France would be valued it they retained the ability to depreciate their currency in times of economic stress. Oh well, when in doubt about domestic outcomes BOMB ISIS.