Dust-Biting All Around: "All The Market's Juice Has Been Squeezed Out"

Authored by Michael Every via Rabobank,

Climate change, deforestation and desertification have their financial analogy. After all, the financial landscape surely looks like a desert these days – as all juice has been squeezed out. German 10y Bund yields are back below zero, equity indices close to record highs and volatility measures (be that of FX, equities or fixed income) close to record lows. So, when in the desert, make sure you have enough water on you.

Talking of deserts, we have already seen quite some dust biting this week...

Let’s start for instance in the UK where PM May’s efforts to avoid taking part in the EP elections are –very unsurprisingly– running into a wall of sand. A government official yesterday said it is unlikely that the PM will bring the Brexit bill, the official bill that had been kept under wraps, to Parliament next week. And any further delays would make it impossible to get it ratified before 23 May. So, with talks between Conservatives and Labour seemingly stuck (note that Labour might actually reinforce its negotiating position through the EP election outcome), biting the European dust would now seem to be Theresa May’s fate. Cable already fell through the psychological 1.30 barrier earlier this week but this sentiment was further highlighted yesterday, as GBPUSD briefly touched 1.2870. This adds to the evidence that the extension for the Brexit date won earlier by May is not seen in a positive light by the market, because it merely raises the risks but without any commensurate opportunities. Any investor can tell you that is a bad place to be in.

Another key person that arguably bit some dust yesterday was French President Macron, who for the first time during his presidency (! – mistake no. 1? @Trump: eat your heart out!) had an official meeting with the press. The French president blamed some of the public anger, which culminated in violent yellow vest protests that have wrecked the country, on himself. Presenting in a humble fashion and living the dream of “Liberté, Égalité et Fraternité”, Macron said he can “do better”, announcing several new measures to address the public discontent that had been further exposed during the Grand Débat National that took place in March-April. Clearly, some of these measures had a bit of a populist smell to it. But what do you do, when you suddenly realise that you are not as much in control of the situation as you thought you were? Tax cuts for the middle classes worth about 5bn (financed by the elimination of tax benefits for companies, although details are still lacking), the abolishment of the prestigious school ENA, tying low pensions to inflation (as from 2020) and several institutional reforms that would give a better representation of voters at the national and regional level. But the key question obviously is: will it be enough? Can France finally return to business? Yellow vest supporters clearly were not impressed... and neither was the public at large, with a Harris poll suggesting that 63% of the respondents were unconvinced. An economic rebound in the course of this year could perhaps provide the necessary juice for Mr. Macron’s plans to turn around sentiment. But – as we all know too well, this is far from assured.

The risk of failure was underscored by the ECB’s Economic Bulletin, published yesterday. The introductory text largely reflected the more dovish tone set in recent ECB press conferences, noting that the information that has become available since the Governing Council’s monetary policy meeting in March confirms “slower growth momentum extending into the current year.” The text emphasized that Euro area weakness was first and foremost the result of a slowdown in external demand, which had been compounded by country- and sector-specific (domestic) factors, some of which had started to unwind. Despite the latter, the risk to the outlook remains tilted to the downside. Together with the persistence of uncertainties related to geopolitical factors, protectionism, and vulnerabilities in emerging markets, it was argued that the current state of the economy still required significant monetary policy stimulus. This, in turn, would be ensured by the current forward guidance, the reinvestment policy and the upcoming new series of TLTROs. In other words: things are not looking great, but – rest assured – the ECB is in control of the situation!

But the question is whether it is not being overtaken in dovishness – left and right – by other central banks. Case in point yesterday were the BoJ and Riksbank decisions. The BoJ, on which we already reported in yesterday’s Global Daily, introduced new language in is forward guidance, basically assuring the market that it won’t make any tightening moves until spring 2020. That makes the ECB’s language (no rate hike this year) look pusillanimous, although we must admit that the yen actually strengthened slightly against both the dollar and the euro on the back of Kuroda’s press conference. That certainly wasn’t the case for the Riksbank, which decided to delay its planned rate hike increase to early next year whilst extending their bond purchasing program to the end of 2020. The Riksbank argued that unexpectedly low inflation both in Sweden and abroad and low interest rates abroad, together with uncertainty over global developments required caution in setting policy. The Swedish Krona plunged as a result, falling 1.5% in the first 30 minutes following the decision, to settle at around 10.62, which is still almost 1% weaker than the previous trading day