With the ECB running dangerously low on bonds to monetize even as its QE program has failed to spur inflation, Mario Draghi may have no choice but to unveil drastic changes to the central bank's QE programm tomorrow. Here are the options available to the central banker, and some ideas of how markets may react.
“Here we are eight years later - do you think the public knows how this happened? Do you think the public knows all of the recommendations made to the Justice Department?” Pascrell said Wednesday in an interview. “Why are Hillary Clinton’s e-mails any more important?”
"The unthinkable: BB yields about to become negative. Such has been Draghi’s influence across the whole credit market that we are close to seeing our first negative yielding BB-rated bond. But if debt costs for speculative grade companies become “inverted”, then the economics of LBOs will be transformed, and the quality of the assets they are buying will become secondary. We see a growing risk that another private equity cycle emerges in Europe."
Overnight the debate over the fate of the OPEC oil production got a new and unexpected entrant when Russian president, Vladimir Putin said he’d like OPEC and Russia to reach a deal to freeze supply and expects the dispute over Iran’s participation can be resolved. Putin sided with Iran saying that oil producers recognize that the middle-eastern nation, which has mostly restored the output halted during three years of trade restrictions, deserves to complete its return to world markets
So far US banks have escaped the recent Libor surge, but the higher funding costs and shrunken market are hitting Japanese banks particularly hard, as they have been sourcing as much as a third of their U.S. dollar liquidity in the short-term U.S. market. Japanese banks have about $125 billion to $150 billion of CP and CDs maturing before the end of September.
The Bank of Japan's near doubling of its purchases of Tokyo shares is causing investors to worry the central bank will dominate financial markets, which could lead to price distortions as it continues to grease the economy. It also prompted a CLSA analyst to tell the truth: "The BOJ is nationalizing the stock market."
European stocks rose and US S&P futures fell after the dollar strengthened following the latest hawkish comments from Fed vice-chair Stanley Fischer signalled that a 2016 rate hike is still being considered and again boosted speculation that US rates will rise this year. The rising dollar pressured commodities and notably oil, which dropped 2% breaking a 7 days stretch of increases; emerging markets retreated.
In the latest quiet trading session, European shares rose while Asian stocks fell and S&P futures were little changed. Minutes of the Fed’s last meeting damped prospects for a U.S. interest-rate hike, sending the Bloomberg Dollar Spot Index doen 0.3%, approaching a three-month low. Dollar weakness continues to buoy commodities, with the Bloomberg Commodity Index set for the most enduring rally in more than two months, as WTI flirted with $47
Overnight, John Williams' latest uberdovish paper "Monetary Policy in a Low R-star World", which we profiled yesterday, and which suggests lower rates for far longer, made the rounds and has led to a steep 0.8% drop in the Bloomberg Dollar spot Index, which sank to its weakest since June while the yen strengthened 1.2 percent, slipping briefly below 100 against the greenback for the first time since June 24, pushing oil and gold higher, and Asian shares lower.
"Low vol and rising prices is a perfect recipe for fast money / the street getting longer. You no longer get punished on random positions and your P&L keeps steadily ticking higher. Thus you feel emboldened to get longer as you don’t feel the risk that you are carrying. Everyone gets longer for a period of time and then finally you have the ability to have a sell off. I know how it ends, I just have no idea when that is."