Did The ECB Just Say "Watch The U.S. Midterms"?

Submitted by Bloomberg macro commentator Richard Breslow

There was a very important story reported on Bloomberg this morning. And a distressing one, from a trading point of view. It suggested the likelihood that the ECB’s economic forecasts have been downgraded and the new projections will be announced after Thursday’s rate-setting meeting. It’s a most interesting development. Not because it will upset expectations for the outcome of the meeting. Other than to perhaps dampen the excitement of those that have been warning us to buckle up because we could be in for a hawkish surprise. What intrigued me was the utterly muted reaction to the news. And this in a world where markets often overreact to spurious headlines and comments.

To be fair, there was some movement in the euro and bunds, but you would be hard pressed to notice it if you weren’t watching the minute-by-minute charts. What struck me is that European equities didn’t seem to take much joy from the news nor, more tellingly, did the dollar.

And this on a day when consumer confidence in Australia fell out of bed and no one is saying it’s stronger than it looks. Not to mention that Chinese and South Korean numbers were noticeable misses sending the Shanghai Composite and the Hang Seng to new lows on the year.

Emerging market currencies seem to be the prime beneficiaries, but I can’t help but wonder if this wasn’t on a change in any European rate expectations but the fact that the dollar may not be the all-powerful king we’ve been making it out to be.

Everyone, including myself, has been factoring dollar strength into our ideas. It has been running roughshod over everything else. Right? Yet, even with today’s meager range, we have seen these prices in the dollar index every day since the end of August. More significantly, the same can be said of the more inclusive Bloomberg Dollar Index.

The summer is over and it should be back to school for everyone, including capital markets. But I rarely talk to anyone outside the U.S. without being asked what is going on in America? And it’s never broached with mere idle curiosity. It’s more like a different spin on fear and greed.

Markets are global animals, even though we too often think otherwise. Everyone, and I mean everyone, outside the U.S., is consumed with interest in the midterm elections. I have this morbid fear, that, rightly or wrongly, we could sit very close to these levels until we find out the results. It also makes me convinced that to think the outcome won’t potentially have profound effects on where we go between then and the end of the year would be a mistake.

I’d hate to think we will have to wait until then to see the volatility spike that could make things interesting.