Another moment in time with Rick Santelli. We reviewed some of today’s early market reactions to the weekend events. A measure of the impact of President Mario Draghi’s ECB policy was reflected in the prices of European sovereign debt. The political news out of Spain and Italy let alone recent elections in Austria and the Czech Republic SHOULD have sent Italian and Spanish yields HIGHER but because of the ECB’s ongoing LARGE ASSET PURCHASES Spanish and Italian yields on 10-year debt actually dropped the most today.
(Click on the image to watch me and Rick discuss the weekend’s events.)
Now, if you are Draghi you are crowing about the success of your QE program. BUT, if you believe in the need for markets to determine the value of sovereign bonds, this is an absolute disaster. The immense amount of purchases will make it more difficult for the ECB to extricate itself from the bond markets. The more central banks control asset prices the greater the damage to the market pricing mechanism. Thursday will bring news about the ECB‘s plans about the PACE and DURATION of the program. If the ECB cuts its monthly purchases 40 billion euros but extends the program by nine months the effect will be neutralized, whereas if the ECB only cuts the PACE the EURO will rally. Thursday morning will be very volatile across many asset classes depending upon the ECB, and, of course, Mario Draghi’s press conference.
As Rick and I discussed today, the EUR/YEN cross is at two-year highs (i.e. the euro is strong versus the yen) and may force the ECB to keep as much downward pressure as possible on the EURO. The euro/yen cross reversed today by the close as U.S. equities experienced a sell-off by day’s end. The cross high was 134.13 and closed at 133.29. This cross is critical for the European car manufacturers, especially the Germans as they compete with the Japanese for the luxury auto market.
***Sunday’s Japanese election provided a significant victory for Prime Minister Abe and will enhance the probability of BOJ Governor Kuroda remaining at the BOJ. In an article in Monday’s online edition of Foreign Affairs Tobias Harris of the Teneo Group wrote a summation of the election titled, “Giving Up Hope.” He noted that the Party of Hope headed by Yuriko Koike fizzled. The current Governor of Tokyo, who was considered a major challenger to Abe, ended the campaign so badly weakened that she was in Paris for a global conference of mayors when the results were announced. As Harris wrote: “After fielding 235 candidates, the Party of Hope won only 49 seats.” Further, “the Party of Hope performed especially poorly in Tokyo given Koike’s base in the capital, winning only one of its 25 districts and finishing third in the capital regions proportional representation bloc.”
This has strengthened Abe’s hand to keep the stimulus program in place. Also, keep in mind that Governor Kuroda replaced two of the more hawkish members of the BOJ so from a monetary standpoint the guardian of QQE has a free hand to operate. Even though there are few JGBs to buy the Nikkei offers plenty of potential targets for QUALITATIVE EASE. One area that concerns me about Japanese equities is the inability of Japanese banks to rally with the Nikkei making 21-year highs. I have been long MTU and MFG (both ADRS). If Chair Yellen wants to see paint dry, watch the major Japanese bank stocks.
***Ridiculous stock price of the day: JPMORGAN made a high of $99.99, just short of Jim Cramer’s $100 target. Really?!?! The traders couldn’t get a $100 print?!? Bring back the specialists ($99.99, the tape was painted by Earl Scheib).
Tags: ECB, euro/yen cross, Fed, Janet Yellen, Japan, Kuroda, Mario Draghi, QE, Shinzo Abe
October 23, 2017 at 9:40 pm |
Earl Scheib, lol It used to be 19.95 would get the job done!
October 23, 2017 at 10:22 pm |
In my youth, I had a car painted by them and had no idea they didn’t wash the car first. Well, not sure what happened but the blue paint over original white quickly fell off where there were specks of mud just behind the wheels.
It looked pretty good otherwise, for a $300 car.
October 24, 2017 at 9:20 am |
Yra,
Blog Post Request:
Would love to hear your thoughts on how the SNB might get themselves out of their Neg Int Rates OR do they play Alchemist forever??
October 24, 2017 at 9:23 am |
Trader–reading my mind.Just went throught ehEur/chf chart and I am wondering if the SNB is going to begin BUYING swiss francs and selling equities to commence QT especially as we approach the 1.20 level of January ,2105—they have enormous profits
October 24, 2017 at 12:34 pm |
Yra,
Understand your previous answer for potential Buy CHF and Sell equities.
I dont know how to ask this question without posing it as a trade recommendation so I’ll try and ask it this:
How do you view the negative short term rates = 3 Month Euro Swiss Int. Rates?( not looking for a trade rec. just curious your thoughts on these neg. 3 month Int. Rates)
October 24, 2017 at 4:07 pm |
Trader—I find negative interest rates an act of insanity and makes me repeat my mantra for the present times–I am not a gold bug but I am certainly not a fiat currency bug either—the world is fraught with danger because of the central banks and their absurd continuation of what were once thought to be tools of crisis management–they seemed to have been trapped into a paradigm of systemic risk–we can’t really remove the QE because of all the debt that was accumulated as a rational response to Bernanke et.al.–so they are like deer in the highlights and the proof of course is in the taper tantrum of May 2013—their fear has promoted the continual crushing of risk premiums or in simple language,stock and bond rallies