Thursday is ECB day as the doves all return to Frankfurt. I will unequivocally say that there will be NO NEW QE ENHANCEMENT. MAYBE PRESIDENT DRAGHI will LOWER THE RESERVE RATE TO NEGATIVE 50 BASIS POINTS but this would only be cosmetic at this point. CURRENTLY, THERE ARE SIX COUNTRIES WHERE EVERYTHING SHORTER THAN TWO YEARS IS OFF LIMITS TO THE ECB’S QE AND TLTRO PROGRAMS BECAUSE THEIR YIELDS ARE LOWER THAN THE NEGATIVE FORTY BASIS POINT THRESHOLD. The ECB is suffering from a lack of assets to purchase so by dropping the reserve deposit rate more sovereign debt is eligible under the ECB guidelines. Again, the political acrimony is Europe is high and with Chancellor Merkel’s popularity in decline Mario Draghi will be reticent to upset German F.M. Schaeuble and Jens Weidmann. Don’t confuse ECB independence with the current political uncertainty in Germany. A drop in the RESERVE DEPOSIT rate will not affect domestic banking levels and if the ECB were to lower rates that would probably follow the Japanese example of having a tiered system so as avoid domestic savers fleeing the banking system.
Schaeuble’s recent ECB criticism confirms the uneasiness in Germany as the good Bavarian Burghers are burdened with financial repression in an effort to bail out the governments and banks of the heavily indebted peripherals and France. In an April 17 Bloomberg News story by Stefan Nicola, Markus Soeder, the Bavarian finance minister and Merkel ally, said the next ECB head should be from Germany. Soeder noted that German savers are being “expropriated” to save southern Europeans from severe debt.
The criticisms of Draghi are very open and the rhetoric is becoming more vitriolic. The economic argument for QE is past. It is politics taking center stage and Draghi will be über cautious. If the reserve rate is lowered at the 6:45 a.m. CDT announcement, the EURO will weaken but be very careful because as usual the Draghi press conference will be far more important. In accordance with last week’s G-20 and IMF agreements, President Draghi will be careful not to talk the EURO lower for any aggressive rhetoric will certainly illicit a response from the Japanese, who were voted the bad actor of currency intervention. This will be a very cautious Draghi.
***In late trading today the U.S. bond markets came under intense selling pressure along the entire curve. But it was the shorter end that initiated the selloff with the 10s and 30s joining late. There is some thought that the steep rise in commodity prices may be interpreted as the TRANSITORY effects of low crude and raw material prices are over and the FED may be more prone to raising rates. It’s far too early to go down that road but nonetheless yields on U.S. Treasuries rose dramatically. As Rick Santelli pointed out, the widening yield differential between German bunds and U.S. 10-year notes led to a sizable dollar rally. One day’s technical reversal is interesting but does not indicate any trend change as of yet. The GOLD and silver also sold off at the end of the day as the precious metals had to take notice of market driven higher short-term yields.
The equity markets held up well as some “better” earnings from large U.S. corporations were deemed a positive. Be patient and watch for any sort of follow-through on the U.S. interest rate market. The December 2016 eurodollar contract, the key barometer, did close under the April 1 low, which means that the market is taking back Yellen’s recent dovishness. The game is on, especially because of the recent robust rally in metals, grains, energy, equity markets and the softness in the DOLLAR. Draghi will be slow to change but will Yellen walk back any sense of a market-influenced rate rise in the U.S. Be patient and wait for the volatility of the headline algo readers to provide opportunity. As they ask in Putney’s Swope (a favorite movie of mine), HOW MANY SYLLABLES MARIO?