By Bill Sokolis, Michael Chrysostomou, David Keeble
LONDON (MNI) –
Hallowe’en has come early to Spain; it is truly scary on the streets of
Barcelona but, so far, EGBs are treating the Catalonian issue as a localised
Less scary was the dovish taper from the ECB. Like Freddy Krueger, Draghi
slashed the amount of purchases in half but the audience didn’t scream. These
audiences have seen far too many scary movies – there needs to be more blood.
Perhaps the Bank of England can make movie goers jump as Carney takes a
chainsaw to monetary stimulus. We know what you’re thinking, more butter knife
than chainsaw and, besides the threatening music has been playing so long that
suspense has peaked.
Yet, is there a surprise still to come? Will it be a ‘Chucky’ Taylor or a
‘Pennywise’ Powell at the Fed?
Activity in U.S. markets has been choppy but gradually improving as tired summer
markets grow smaller in the rear-view mirror.
There’s nothing like debating over who will be the next Federal Reserve
chairman to pass the time with Fed speakers in a blackout out period ahead next
week Wednesday’s FOMC policy announcement (most likely a non-event with most
pundits expecting a hike at the December 13 FOMC).
Rates have had several knee-jerk bouts of risk-on/off moments over the last
few weeks as they react to any hint of who may be more favoured to fill the Fed
Hints dropped by U.S. President Trump (via Politico, Fox News, Twitter,
etc) have helped muddy the water and deliver a shot of real volatility into
markets like a cat batting around a favourite toy mouse.
Gary Cohn is out of the running, Bloomberg reported Wednesday, President
Trump deciding the White House economic advisor is better served at his current
post, citing three people familiar with the matter.
Rumors of Janet Yellen’s reappointment have made the rounds a few times as
well until a Politico source story announced Thursday that Janet Yellen is out
of the running. Or is she?
Prediction markets still pegged the current Fed chairman in the mid-teens
for reappointment. Apparently some market betters don’t think much of Politico’s
As of late Thursday, chances of current Fed board governor Jerome Powell to
be appointed to the post have risen to 63% (PredictIt), while Stanford economist
John Taylor, deemed to be a tail event pick by some earlier in the week
vacillates between 25-35%.
Rates have reacted negatively to increases in Taylor chances with some
traders estimating a clean break for 10Y yields over 2.5% if he closes in on
Powell (lets leave a dual Powell/Taylor chairmanship alone for now, shall we?).
Will President Trump go through and announce his pick before his trip to
Asia on November 3? Maybe he will, or maybe he won’t, just in time for Halloween
Trick or Treat!
By the pricking of my thumb, something wicked this way comes.
Then rang the bells both loud and deep.
God is not dead nor doth he sleep.
The wrong will fail, the right prevail, with peace on Earth, goodwill to men.
Next year, we can imagine a college 101 economics exam running something like
"The ECB is too obsessed with market reactions. Discuss."
Armed with the market reaction to the ECB measures in hand, Draghi
meandered through Thursday’s press conference with a relieved look upon his
A central bank that is known to worry about market reactions will naturally
help suppress volatility and encourage the carry trade and the overwhelming
weight of research reports we received before and after the ECB meeting take the
same approach — Carry On Investing.
Regarding the ECB, Frederik Ducrozet at Pictet Asset Management said that
the press conference was dovish but not completely so. "The statement noted that
an ‘ample’ degree of stimulus was still needed, as opposed to a "very
substantial" degree of accommodation last month. Moreover, the reference to
‘monitoring FX volatility’ was removed."
Tuuli Koivu from Nordea makes an interesting point, "Draghi confirmed,
however, that the role of corporate bonds will be important and we expect their
relative weight to increase and the purchases to continue close to their recent
levels at around EUR 6-7bn per month." Koivu goes on to point out that this will
alleviate the scarcity problem of German bonds.
But the trading suggestions revolved around the carry component although
some carry trades are bullish and others bearish. Renuka Fernandez at Nomura
takes a bearish leaning trade, recommending "a 9m fwd starting EUR 5s30s bear
steepener. However, we take advantage of the high curve carry (close to
three-year highs still) and low volatility environment to express the trade in
option space." More specifically, she suggests buying 9m30y +8bp ATMF payers vs.
sell 9m5y ATMF payers.
We wish we could write something intelligent regarding Catalonia but people
we talk to hold less and less conviction. Earlier, investors were taking
positions, seeing Catalonia as providing a bump up in yields to provide a
cheaper entry point. But events have taken several unpredictable turns and so
Spain is becoming a tape-bomb environment and investors are becoming reactive.
Article 155 will likely go through the Senate today but the degree of
implementation and control by Madrid is now seen as important.
It feels like an eternity but we are just under a week away until the markets
expect the Bank of England MPC to raise rates for the first time in over
10-years. Could it be that rates follow the same old London saying about busses
that you wait for ages for one and then two turn up at the same time, or could
this be one and done?
Following last week’s appearance by Sir David Ramsden, Silvana Tenreyo and
Governor Mark Carney from the BoE at the Treasury select Committee and recent
comments from Jon Cunliffe, markets have questioned how much appetite there was
within the MPC to raise rates further next year. The key question on markets
minds is what the likely MPC vote will be on November 2.
RBC are going for a 7-2 vote for higher rates but expect the MPC to hold
fire for the remainder of 2018. While HSBC say vote is likely to be 6-3 for a
25bp rate increase with Ramsden, Tenreyo and Cunliffe the dissenters, but add
that the vote could easily be 5-4 or 7-2 as both Broadbent and Tenreyo are
keeping their cards close to their chest.
"The smaller the majority, the greater the doubts will be over further
tightening…and the markets will believe this is a ‘one and done’", adds HSBC.
But HSBC still see a second rate hike in May 2018 compared to market pricing of
a further rate rise in August 2018.
HSBC go on to say that markets will be watching how the BoE communicate its
forward guidance and if it wants the market to price in another rise earlier
than is currently priced then it "may reiterate that monetary policy could need
to be tightened by a somewhat greater extent over the forecast period than
The thing is though, if you are waiting at the bus stop having just missed
the two buses and check the expected arrival of the next one, than 1) you could
be waiting a very long time and 2) the times displayed never ever appear
Talk From the Trenches is a compendium of chatter from trading rooms, and
is offered as a gauge of the mood in the financial markets. It is not
necessarily hard, verified news.
–MNI London Bureau; +44-203-586-2230; email: email@example.com