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Guns (and not bazookas) dominate ECB's crisis arsenal

Guns (and not bazookas) dominate ECB's crisis arsenal

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Comments of the Day

11 January 2019



Video commentary for January 10th 2019



Eoin Treacy's view

A link to today's video commentary is posted in the Subscriber's Area. 

Some of the topics discussed include: liquidity conditions remain tight, 2-year yields test the MA, S&P500 at first area of potential resistance, signs of early upside leadership in biotech and cloud computing, gold eases, oil steady. 



Guns (and not bazookas) dominate ECB's crisis arsenal

This report from Danske Bank includes a Wu/Xia shadow banking measure for the Eurozone I had not seen previously. Here is a section:

The first TLTROII operations will have a residual maturity falling below one year this summer, which may lead to a liquidity squeeze for certain euro area banks within a few months. Therefore, we expect it to be quite certain that the ECB will have another longerterm liquidity operation, which we expect to be announced in March and implemented in June ahead of the implementation of the new NSFR in July 2019. 

The effectiveness of the operation will depend on the modalities and the devil will be in the detail. It is uncertain how the ECB will structure such an operation and consequently how large a take-up there will be. The crucial modalities include rate procedure, eligibility criteria, maturity. In ECB Research - TLTRO3: Italy to be main beneficiary, 9 November 2018, we argued that if the modalities were identical to the ‘carrot approach’ under TLTRO2, we could see an additional EUR100-150bn taken. However, with the recent comments from ECB President Mario Draghi at the December press conference, we are leaning towards similar terms as with the 2011/12 VLTRO operations

Step 2 – postpone the guidance on the first rate hike
The first easy choice indicating a change in policy direction is a postponement of the first rate hike beyond the current ‘at least through the summer of 2019’ language from the ECB. The ECB has been doing forward guidance in recent years, and so stronger guidance is not a new phenomenon or politically difficult to do. However, with the US slowing down and China likewise, a significant postponement of an ECB hike guidance could well also mean that the ECB will not be able to hike in this cycle – leaving less room for manoeuvre in a future recession. 

However, markets have already re-priced ECB expectations and this measure would be likely to have a limited impact. If the next step were communicated as a cut, however, a marked impact should be expected. 


Eoin Treacy's view

A link to the full report is posted in the Subscriber's Area.

The ECB had to abandon conventional Austrian doctrine and re-embark on quantitative easing in 2015, in large part to unwind the damage done to the region’s economy from withdrawing the first round of stimulus. The latest round of QE has just ended and the German economy is on the cusp of at least a technical recession, France and Italy are already embarking on fiscal stimulus and the banking sector is in a shambles. It is only a matter of time before another ECB volte face.



Mnuchin Massacre Christmas Eve Bottom?

This article by Muir for his Macro Tourist blog may be of interest to subscribers. Here is a section:

Remember back a half-dozen years ago when all the hedgies were bearish and David Tepper came out and said something to the effect of; “if the economy weakens, then the Fed will ease and stocks go up. If the economy strengthens, then stocks will go up because earnings will be rising. Therefore I am buying.”

Well, I think it’s almost the exact opposite situation today. If the economy strengthens then Powell will hike and stocks will fall from the liquidity withdrawal. If the economy weakens, then Powell has shown he is loathe to come to the market’s rescue and he will be slow to lower rates.

I don’t think you need to overthink this. The Fed has tightened into either a slowdown, or a recession. The market sniffed it out, but the Fed ignored the signals for a bit and made the sell-off worse. Now the market is in the process of correcting that overreaction by rallying.

But don’t forget that Powell has absolutely no stomach for frothy financial markets, so beware getting too excited about the Fed’s recent dovish talk. This is not Yellen or Bernanke’s Fed. Powell has a different set of beliefs, and although he has succumbed to market pressures for the moment, it won’t take much for the old tone-deaf Powell to return.


Eoin Treacy's view

Powell reiterated his view today in expressing the Fed’s patience with interest rate hikes but committing to continued balance sheet run-off. The market has already priced in the opinion the Fed will not raise rates again and will probably be cutting rates in 2020.



Email of the day on yield curve inversions

Before Xmas I forwarded an article by EPB Macro Economics who assessed that the Fed had already tightened too much and that a marked slowing of the economy was inevitable.  The latest EPB report (see attached) highlights that there has already been an inversion in US Treasuries, and that the Fed interest rate cycle has now peaked, but deteriorating economic data will cause more volatility in equity markets.


Eoin Treacy's view

A link to the full report and a section from it are posted in the Subscriber's Area.

I agree we are late in the cycle and that has been a constant theme in the Subscriber's video for the last 18 months. The inconsistency in the trends on Wall Street, with evidence of completed top formations until proven otherwise is a clear indication that this is a particularly important time to pay attention to liquidity and credit conditions. Here is a section from the report:



Email of the day on the Subscriber's Video

Eoin/Sarah, I think I've asked you before but are E's video's available in writing? I do find them somewhat tedious and long winded to listen to. And time consuming. I see my sub is up for renewal I'm not sure I'm going to continue anymore if I can't get more of his wisdom in writing. Perhaps I'm missing something? Please advise. Cheers


Eoin Treacy's view

Thank you for this email which I thought would be worth sharing with subscribers. We provide this service at below cost and on a levelized basis to everyone from sovereign wealth funds to entrepreneurs, family offices to retirees and everyone in between on a global scale. It’s a vocation for both David and I but it’s always a challenge to keep up with the pace of communications technology and the service has morphed over the last 16 years from a print publication to being purely online and providing written, audio and video commentary as well as access to the Chart Library.

I started providing the videos more than two years ago and there is no doubt it takes longer to talk through a chart than to simply speak about the markets. The old audios seldom ran above 15 minutes but it seems to just take longer to cover the same topics while recording videos. Delegates at The Chart Seminar in Australia and the UK last year reported preferring the videos because they no longer have to pull up the charts by hand while listening.

I am willing to trial voice to text software but from what I have heard it is error prone so the transcripts are bound to have typos or be incomprehensible and I do not have the time to edit them in a timely manner for publication. Transcription services generally cost $5 per minute for express service, which is within 12 hours so it is doubtful I would get them back in a timely manner for a daily service.

I think the best thing is to cover the three most important points of the day in the first five minutes of the video and progress to bigger topics from there. I don’t plan on altering the Friday Big Picture format.



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