Rates, Equities Out of Synch, Dollar on the Ropes
01/18/2018 11:17 am EST
With rates and equities out of synch and the USD on the ropes, financial conditions matter more than the cost of money but for the momentum – leaving the 5-30Y flattening and the focus on 10Y TIPS Thursday exciting, Bob Savage, CEO of Track Research Wednesday.
More of the same – reversals of the reversals. Much has been written already that Wednesday is about undoing the panic of trend reversals from Tuesday.
Let’s be clear, the U.S. dollar (USD/EUR) bounce up isn’t going to make anyone think we have seen the bottom. A 0.3% bounce after 2 weeks down 2% doesn’t change sentiment.
The ECB speeches Wednesday matter for the forex world as they suggest monitoring the forex rate makes sense. Constancio and Nowotny both remarked on the euro forex rate as worthy of monitoring; Constancio said he’s concerned when euro moves don’t reflect fundamentals, while he also noted inflation declined slightly in December.
Hall monitors are an infamous part of public education, where wandering the halls is a sign of trouble. The wandering of the euro to 1.23 may be the same thing Wednesday.
The no-fear trade in equities in equities looks crowded and the U.S. failure at new highs Tuesday smacks of some correlation to the EUR failure. Could a government shutdown spook the stock market?
The cryptocurrency pain trade was similar to equities – just more dramatic – as bitcoin (BTC) is 47.3% peak to trough since touching near $20,000 in December - suggesting it’s not just the baby boomers who have to deal with newfound volatility in the trends.
There are times when hall monitors make everything look problematic but this is like blaming central bankers for the market – it’s the investors who make asset markets tick now as QE and the free money punch bowl appear set to end.
The central bankers are now trying to follow the FOMC and explain that rate hikes aren’t yet removing accommodation. Witness one of the key events Wednesday – the Bank of Canada – holding an iron fist with a velvet glove on inflation with its 25bps hike to 1.25% as expected.
BOE Saunders speech made the same point further hikes aren’t restrictive policy yet. Overnight we got other reasons for political doubt – from the Taiwan earthquake to the Czech government resignation to the UK Brexit vote to the stalled U.S. government budget talks.
We also got plenty of good data from Australia and Japan helping keep rate watches there ticking while in Europe the inflation report was unrevised and not sufficient to drive up talk for ECB responses now – leaving many thinking it’s the U.S. rate watch that matters with a March hike a given and a June now expected.
What all this means is still not clear – with rates and equities still out of synch and with the USD still on the ropes, financial conditions matter more than the cost of money but for the momentum – leaving the 5-30Y flattening and the focus on 10-year TIPS Thursday that much more exciting.