ECB Reportedly Considering Slashing QE In Half In January, EURUSD Shrugs

Mario Draghi"s "leaks" have lost their mojo.

ECB officials are considering cutting their monthly bond buying by at least half starting in January and keeping their program active for at least nine months, according to Bloomberg which cites "officials familiar with the debate".

Reducing quantitative easing to 30 billion euros ($36 billion) a month from the current pace of 60 billion euros is a feasible option, said the officials, who asked not to be identified because the deliberations are private. While the central bank’s governors are split on the need to identify an end date for purchases, a pledge to keep buying bonds until September -- with the proviso that it could be extended if needed -- may offer grounds for compromise, they said.

Policy makers led by President Mario Draghi are becoming increasingly confident that ECB policy makers will on Oct. 26 agree to the specifics of how much debt the euro-area’s central banks will buy in the coming year. After more than 2 1/2 years of trying to revive the region’s economy through bond purchases, some governors see the recent period of robust growth as a reason to rein in the support. Others are concerned that inflation remains too weak.

Separately, the ECB"s trial balloon sources must have been working in overdrive because the central bank"s favorite media outlet, the FX trading desk also known as Reuters, just blasted a similar report according to which "ECB policymakers are in broad agreement to prolong asset purchases at a lower volume at their October meeting with views converging on a nine months extension."

The details:

• ECB has consensus to extend asset purchases at lower volumes on Oct 26


• Agreed on reducing buys from €60 bln/month for nine months


• Debating buys between €25-40 bln, whether programme should be open-ended


• Reuters sources say no formal proposals made yet


• €25BN would be on the lower side of expectations


• Draghi defended pledge to keep rates low well past QE Thurs

EURUSD dipped a whole 15 pips on the headlines... then rallied it all back.

Typically this kind of leak is a strawman aimed at testing the market"s response in an effort to gauge just how ready traders are to accept the punchbowl being removed.

In this case the now-blinkered traders in FX land seem to have either lost all confidence in these leaks, or all belief that Draghi can ever pull out without immediately piling back in at the first sign of weakness.

European Stocks Have Never, Ever Been This Cheap Relative To American Markets

European stocks are offering the biggest discount on record relative to U.S. peers, according to one metric.

Members of the Stoxx Europe 600 Index are trading at 1.8 times the value of their assets, almost half that of S&P 500 Index constituents, the largest gap since Bloomberg started tracking the data in 2002.

World-beating gains in U.S. equities since the bull market kicked off in 2009 has widened the distance between the two, while recent volatility has also rendered its derivatives the most expensive relative to Europe since August 2015"s China deval collapse...

However, it appears Europe"s macro surprise data is rolling over and catching down to US macro surprise data...

And perhaps worse still, EURUSD is rolling over (just as it did in 2013), ready to catch down to its rates-implied level, crushing USD-relative returns...

But of course, it"s what happens next here that really matters...

Yellen and Draghi next week in Jackson Hole may hint ath whether this is the end of the beginning or the beginning of the end.

Losing My Religion - "Central Banking Increasingly Looks Like An Act Of Faith"

Authored by Jeffrey Snider via Alhambra Investment Partners,

Well, that clears that up. In case you missed it, back on June 27 Mario Draghi triggered the latest declared BOND ROUT!!! with what was characterized as a very upbeat economic assessment for Europe. And if things are moving forward there, they just have to be everywhere else.

It came off as “hawkish” in the sense that if real acceleration is at hand, ECB normalization of first QE then interest rates can’t be that far behind. The closer we are to the first part, closer is the second. Bonds sold off, and the collective mainstream imagination ran wild.

In truth, Draghi wasn’t “hawkish” at all, nor was he all that upbeat. The media, primarily, saw what it wanted and connected dots that it had created. As for the economy, he merely stated that it was progressing. Why that was particularly important was never stated, especially since Mario Draghi always says the economy is progressing. Out of his mouth, it never is otherwise.

More important than all that, however, the ECB chief was left to try to describe the current state of our central money problem, without recognizing it yet as just that. The economy may or may not be meaningfully improved, but inflation, the economy’s chief monetary indicator along with bond rates, will not behave. For Draghi’s speech, it was characterized as a contradiction.

Following the latest policy meeting, the mainstream believes Draghi is now “dovish.” Gone is the certainty with which the world seemed to be moving toward a better place, replaced with caution and apprehension. Many ascribe this apparent 180 degree shift as a policymaker not wanting to upset markets. If bonds sold off in a rout after his last speech, he must have noticed and reacted with a more soothing posture this time.

None of that is actually going on, of course. Draghi was no more “hawkish” in late June as he isn’t now “dovish” in mid-July. At both times he was consistently confused. Today, he came as close as might be ever expected to stating that as a fact outright:

There really isn’t any convincing sign of a pickup in inflation.

As some reports noted, he stated that same thing several times with slightly different wording. The problem continues to be an absence of all the things required to make money become inflation – starting with wage growth. Without that, can the economy really be improving?

The answer is no, and even an economist like Mario Draghi knows it. In that respect, the European economy is as stuck as the US economy. When friendly outlets like the New York Times notice this lacking vital component, it cannot be as something of a trivial difference:

Central banking increasingly looks like an act of faith.

Mario Draghi, the president of the European Central Bank, and his Bank of Japan counterpart, Haruhiko Kuroda, have spent trillions of euros and yen without generating as much inflation as they want. Yet they have little choice but to insist their policies will eventually work.

The eurozone is finally experiencing a robust recovery and the only things lacking are a pickup in wages and inflation, Mr. Draghi said on Thursday.

Is it really a “robust recovery” without a pickup in wages and household income? Mr. Kuroda can answer that question best with Japan’s experience stuck for a quarter century in, of all things, Japanification. The essence of that permanent stagnation is the lack of income and wage growth, the lagging behind of households that policymakers can’t for some reason see as the most important economic element.

Work equals recovery, and with more work comes more wages. Anything else is just the shifting of numbers, the economy flying erratically like a rocket without its tail fins.

Europe’s economy is booming, except it’s not. Mario Draghi is hawkish, except he’s not. If there is one thing policymakers, media, and regular folks in all these places are starting to really understand, it’s that something important continues to be missing. They may not yet know what it is, so the focus on inflation (and the bond market) is good in that “we” are finally starting to ask the right questions.

Treasury Yields Tumble To Lowest Since June As Stocks Sink

Treasury yields are tumbling once again (10Y at 2.25%, the lowest since June 29th) - as more weak US macro data is compounding Yellen"s dovish tilt from last week. As bond yields began to tumble, so stocks rolled over and VIX jerked above 10...

10Y Yields have retraced exactly 50% of the post-hawkish-Draghi swing higher...

Notably UST bonds relationship to Bunds has broken down in the last week...

And while yields are testing the lows of the day, stocks are rebounding.. because that"s what they do...

Nasdaq remains the only major index in the green for now...

Cranfield: "This Was A Watershed Week For The Euro: Beware Of Getting Steamrolled"

After three days of fireworks for the Euro, when it first surged on Draghi"s hawkish comments, then tumbled on the ECB"s "clarification" to Bloomberg that the market had overreacted to Draghi, then continued to surge after Draghi himself did little to dissuade the market it was wrong, the common currency is now trading at above 1.14, or 1.1425 to be precise...

... the highest level in one year, and on a relentless push higher, as the dollar tumbles, because as Sean Callow, currency strategist at Westpac says, “it will take more than anonymous ECB sources to cool the desire to bet on the euro and dump the dollar,” and adds “many investors are tantalized by the prospect of key quarterly meetings in September producing no move from the Fed but a plan to wind down quantitative easing at the ECB.”

But how did we get here so fast, just a few months after virtually every sellside desk expected parity with the USD, and what"s next? Here are some thoughts from the latest "Macro View" by Mark Cranfield, former .FX trader who currently writes for Bloomberg.

Euro Is Dancing the Macron, Draghi Two Step:

This week could be seen as a watershed for the euro, the week when all the stars align to set up a powerful run in the second half of the year. 

ECB President Mario Draghi is acknowledging reflationary forces as investors are getting comfortable with improving European economic and political fundamentals.

The tectonic plates are shifting in favor of the euro, even if some ECB members are saying that markets are jumping to the wrong conclusions.

At the beginning of 2017, research notes were being circulated with scary maps of the European electoral earthquakes ahead, starting with the Netherlands in March.

It was going to be a roller-coaster year. The rise of populism had been given a steroid boost after the U.S. presidential election and European nations were poised to follow by electing their own version of Donald Trump. The old order was going to be toppled, even Angela Merkel seemed vulnerable.

Not quite, as it’s turning out. Even the threat of a destabilizing Italian vote seems to be evaporating.

The Trump effect isn’t coming through, and the new order is being led by a staunch European supporter called Emmanuel Macron. European politics is going from zero to hero.

What a contrast with the developments across the Atlantic.

Looking at a long-term picture of euro-dollar, one can see the potential for a major breakout as bullish momentum builds up. The pair has essentially been in a range between 1.05 and 1.15 for the past two and a half years after the huge collapse in 2014-2015. If it does break the top side it probably won’t be quietly.

When the world’s number two reserve currency gets rolling, it’s probably best to get on board or run the risk of being steamrollered.

Merkel Says There Is A "Problem" With The Euro, Blames Mario Draghi

Two weeks ago, German finance minister Wolfgang Schauble confirmed Donald Trump"s charge that the Euro is far "too low" for Germany, but said he is unable to do anything about it and instead blamed Mario Draghi. “The euro exchange rate is, strictly speaking, too low for the German economy’s competitive position,” he told Tagesspiegel on February 5. “When ECB chief Mario Draghi embarked on the expansive monetary policy, I told him he would drive up Germany’s export surplus . . . I promised then not to publicly criticise this [policy] course. But then I don’t want to be criticized for the consequences of this policy.”

Then, on Saturday, his boss German Chancellor Angela Merkel echoed her finance minister, and also admitted that the euro is indeed "too low" for Germany, but once again made clear that Berlin had no power to address this "problem" because monetary policy was set by the independent European Central Bank.

"We have at the moment in the euro zone of course a problem with the
value of the euro," Merkel said in an unusual foray into foreign
exchange rate policy.

Merkel also confirmed that Germany benefits from not having the Deutsche Mark, whose value would be far higher, and instead piggybacks on the weakness of other European nations, implicitly confirming recurring allegations that Germany benefits from the misery of Europe"s periphery.

"The ECB has a monetary policy that is not geared to Germany, rather it is tailored (to countries) from Portugal to Slovenia or Slovakia. If we still had the (German) D-Mark it would surely have a different value than the euro does at the moment. But this is an independent monetary policy over which I have no influence as German chancellor."

We showed this :fair value" divergence two weeks ago in the following chart:

Merkel"s comments addressed recent criticism by Peter Navarro, who has accused Germany of profiting from a "grossly undervalued" euro.  The chancellor made her remarks at the previously discussed Munich Security Conference, where Vice President Mike Pence was eager to reassure European allies of American "unwavering" support for NATO even as he asked the organization"s member states to pay up.

The euro has fallen nearly 25 percent against the dollar over the past three years, touching a 14-year low of $1.034 in January. But it has since risen to roughly $1.061. In late January, Peter Navarro, the head of Trump"s new National Trade Council, said the euro"s low valuation was giving Germany an edge over the United States and its European Union partners.

His comments came weeks after Trump himself said the dollar"s strength against the Chinese yuan "is killing us", deepening concerns that his administration could pursue a more confrontational, protectionist approach to trade.

Merkel and other German officials pushed back forcefully at the time, however in an odd reversal, first Germany"s finance minister, and now Merkel herself admits that Trump is right, at least when it comes to Germany, whose current account has continued to soar, and come to think of it, with Germany"s export dominance, so has the current account of Europe, which in December hit a new all time high.

A recent note by Bank of America"s Athanasios Vamvakidis confirmed how materially the EUR is undervalued relative to the USD:

Our models suggest that the Euro is undervalued, but only by about 2% in trade weighted terms. It was much more undervalued in the early days of QE, by 7%, and in the early 2000s, by 18%. However, EUR/USD is undervalued by 9.6% (Chart 4). This reflects the strength of the USD, which is overvalued by 13.4% in trade weighted terms. Compared with the rest of G10, the Euro looks cheap against NZD, CHF and JPY and expensive against NOK and SEK (Chart 5).

And so, not one but two strong hints by Germany"s most powerful politicians that Trump should take his fight against the "grossly undervalued" euro away from Berlin, and focus on Frankfurt and the ECB, and specifically Mario Draghi, will Trump"s inevitable focus on the European Central Bank - and its massive balance sheet...

... change the dynamics of European monetary policy, and prompt an even faster taper of Draghi"s asset purchases? We don"t know. We do know, however, that we will pay good money for a solid, decent twitter fight between @realDonaldTrump and the @ECB, in other USD or EUR.

Market Not Happy With Fillon Statement: Spread To Germany Spikes

Blue Horse Shoe is right. If your goal is to gamble, go puts. Risk vs Reward, you should go leveraged Treasury or Gold Miner funds. Go hard but don"t have assets expire worthless.  The short term fuckery is unmatched at this time, hell, China propped to the tune of $1tril/week these past 2 months..