High Impact Events Trading... Gold & Copper

Thank you ET for the beautiful preview. Tomorrow is Draghi's second last meeting as ECB head and he is going down as the only ECB chair who never hiked. Started with a cut and very likely ending the same way.

European Central Bank Meeting • Thursday 12.9.2019.


The European Central Bank (ECB) will meet tomorrow in what is likely to be a crucially important meeting.

The Eurozone economy has continued to tread water, with decent service sector data offset by a mightily struggling manufacturing sector. Thus far, these two forces have acted as roughly balanced counterweights, keeping the Eurozone economy out of a recession and allowing the ECB to stay on the sidelines. As more time has passed without a rebound, however, monetary policymakers have grown increasingly uneasy, particularly as political risks related to Brexit and Italy have reared their heads.

My expectation is that the ECB will cut rates 10 bps and restart its QE program. Specifically, I expect the ECB to buy €45 billion a month in sovereign bonds for the next 12 months.
Recent pushback against restarting QE from some ECB officials, however, makes the second portion of this forecast more uncertain than the first.

Previous: -0.40%

Personal opinion: -0.50%

Consensus: -0.50% (Deposit Rate)

Great insight here!

Which bonds? How do you think they'd diversify?

Thanks swag. I will have a preview up later tonight on the ECB meeting as well.

Nice write-up!

I'm thinking a rate cut is more likely than a resumption of QE. I certainly hope we get a €45 billion purchase program for gold's sake, I've just seen the ECB disappoint the market so many times it's what I've come to expect from them.

Thanks ET, I look forward to hearing your thoughts on it as well.

We're talking about the same kind of bond purchasing we saw from 2015-2018, merely a resumption of their old QE program.

So what they will try to do is inject liquidty in the system. From 2015-2018 they bought 1.9tn$ worth of government bonds from various european countries, that represents more then 90% of the government issued bonds.

To get a sense of just how much the landscape has changed over the past four years, it is worth looking in detail at the distribution of Eurozone public debt ownership before and after QE:


On average over this period, over 15 per cent of total Eurozone public debt has moved on to the balance sheets of the national central banks of the Euro-system, up from about 4 per cent before QE began.


In some countries like Italy investors took advantage of this buying and dumped their bonds knowing ECB would buy them and crank the price up.

I don't think they'd do any more diversification then they did from 2015-2018 (sticking to european government bonds), they will be very predictable and it will be easy for big holders to dump their bonds at any given time, potentially hurting the monetary system long term.


In my opinion this program is a total disaster and should not be resumed. I'm not alone in this opinion... as i've already stated the QE forecast is much more uncertain than the rate cut forecast. Here's why:




To explain the image further here are some quotes from EU central bank chiefs:
“It should only be used if you have a risk of deflation; and the risk of deflation is nowhere to be seen” -- Sabine Lautenschlaeger, Executive Board

“I call for special caution with government bond purchases” -- Jens Weidmann, Bundesbank

“Is it necessary to do so just now? This is a question to be discussed” -- Francois Villeroy de Galhau, Bank of France

“There is no need for it in my reading of the inflation outlook right now” -- Klaas Knot, Dutch central bank

“I’ll probably express more criticism toward proposals for further monetary deepening” -- Robert Holzmann, Austrian central bank

“I don’t think we have a strong case for reactivating QE now” -- Madis Muller, Estonian central bank

Draghi has never faced such an oposition on anything during his term, and these are not some random people, if you take a look at these countries and their use of the euro you can clearly see that this "coalition" is not something Draghi should ignore or take lightly.

Germany, France and the Netherlands account for more than half the euro area’s annual economic output



If there was not for this opposition i'd be sure that ECB would resume QE, but considering all of this, it is very uncertain if the pressure on Draghi will become too great for him to move on with his agenda.

ECB Meeting - September Preview

1. Monetary Policy Statement
2. Main Refinancing Rate
3. ECB Press Conference

Notes

1. QE is where the debate is. Will the ECB deliver and to what extent?
2. The market is expecting the overnight deposit rate to be cut by either 10 or 20 basis points.
3. Euro zone inflation registered a full point below the 2% target in the most recent CPI release, at 1.0%.
4. Growth is slowing. Euro zone GDP fell to 0.2% in Q2 vs 0.4% in Q1. In Q2 of last year, GDP rose 1.2%.
5. Germany, Italy, and Sweden saw GDP falling to or below 0%. Most notably, German GDP fell to -0.1%, while UK's GDP fell to -0.2%.
6. See more in Vorenzd's preview here.

Prior Impacts on Gold and Euro (EUR/USD and EUR/JPY).

March

1. This Monetary Policy Statement was highlighted by the announcement that the ECB will launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III), starting in September 2019 and ending in March 2021.
2. Draghi, in the press conference, stated, "We now expect the key interest rates to remain at their present levels at least through the end of 2019."
   Attached Image

   

April (The arrow points to the start of the ECB Press Conference)

1. No reaction until the start of the press conference when Draghi made comments about raised the prospect of more support for the struggling euro zone economy on Wednesday. This triggered significant declines in the euro and gold.
   Attached Image

   

June

1. Amid expectations that the ECB would signal stimulus measures would be coming, the ECB said it would delay it's first rate hike since the crisis until the middle of 2020. This sent the euro higher.
2. The press conference was highlighted by Draghi remaining calm and focused on the uncertainties, avoiding a dovish tone. This was important because it was just after the RBA cut rates for the first time in three years. The euro gained throughout the ECB meeting, while gold was relatively volatile.
   Attached Image (click to enlarge)

   
   

July

1. In the Monetary Policy Statement, the ECB stated, "The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020". The hinting at lower levels sent the euro lower and gold appreciated modestly.
2. The press conference started a huge reversal that say big moves in both gold and the euro. In some surprising statements Draghi delivered his statements with a hawkish tone. Highlights from the presser that triggered the moves:
   - "No discussion about cutting rates today."
   - "There was no discussion about the size of a rate cut."
   - "We still see risk of a recession being pretty low."
   - "There was no discussion about the size of a rate cut."
   - "We still see signs of resilience in the labour market."
   Attached Image (click to enlarge)

   
   

Overview

QE announcement is the focus - will it be QE or a 'stimulus package'

This is a topic of contention and policy makers have raised their voices about it. Bundesbank President Jens Weidmann and Dutch Governor Klaas Knot have argued the current economic situation doesn’t warrant QE, while France’s Francois Villeroy de Galhau also signaled skepticism. Sabine Lautenschlager, a member of the ECB executive board and Estonian central bank President Madis Muller have also cast doubt on the scale of intervention.

Draghi does have at least one ally. Ollie Rehn, president of the Bank of Finland recently called for an “impactful and significant” stimulus package.

Some form of QE is expected. Defying market expectations could push market rates higher and pose further risk to the economy. An announcement of a repricing of the TLTROs and a restart of QE with 30 billion euro per month is one possible scenario. This would deliver what the market is looking for. Any stimulus package without QE will disappoint. A big disappointment.

Rate cuts? Probably only in one of the three rates. The ECB to take action on the depo rate -- 15 basis point cut is priced in

The cut in the overnight depo rate will either be 10 or 20 basis points. I'd expect volatility on the announcement. The market isn't expecting rate cuts in the marginal lending facility or main refinancing operations.

Expect changes to Inflation outlook, Growth outlook. Downward revisions to staff projections.

Likely scenario:

Inflation Outlook - Previous: Over medium term underlying inflation expected to increase. New: data suggests a pickup in inflation to take longer.

Growth Outlook: Previous: growth expectations tilted to the downside. New: Recent activity suggesting a slowdown in growth. The change in language will be accompanied by downward revisions to staff projections.

The market's expectations are high

All the way back when Trichet was hiking rates well into the financial crisis, the ECB has a funny way of consistently surprising the markets. This ECB meeting comes at a time when other major central banks are easing policy, Germany on the brink of recession, and a weak inflation outlook the market expectations are tilted in a way where it's putting the ECB at risk of disappointing the market. The general consensus is that policy makers will announce a series of loosening measures that won’t really make much of a difference to the struggling European economy. Anything short of not using the most effective instrument (QE), might be taken as quite the disappointment in light of Europe's struggling economies.

Final Thoughts

As a trader, more important than anything else, here's what I think is most important to know.

Draghi earned his nickname. Super Mario. The last time he faced major opposition was in January 2015 when he pushed through large-scale asset purchases. I expect the decision out of the ECB to reflect what Draghi believes is best. Being his last appearance as ECB chief, expect him to deliver to what the market's expecting. In his last meeting, he could leave with a bang and put forward something significant.

Whatever Draghi goes into the presser with, he's already decided. He'll enter that conference with a mission to deliver something very specific, whether dovish or hawkish tone. He's good. Look for the trend that emerges after Draghi begins to deliver his press conference. There's a reason why the euro and gold (and others) take a direction and continue throughout the question and answer session. Draghi sticks to his message.

I'd recommend waiting until Draghi takes the mic and then looking to enter the market.

There are many scenarios that could play out. Anything is possible. That's why, as always, caution is advised.

Excellent preview there ET. Thanks a ton!

LOL! Dis is some good analysis ET! So whatchu saying is we shud go long?!

I purposely left out trade direction because there are so many ways this could play out. Also, many variables that the market has to digest or interpret as dovish/hawkish. My main recommendation is to wait for the press conference in order to eliminate any risk with trying to position yourself ahead of the meeting. That's a recipe for disaster. Unless you are the ultimate risk taker. Then in that case, I'll go grab my popcorn!

I've prepared a dish for myself. I've got some longs running on both DAX and S&P 500 for a while, they're in solid profit... i was really undecided whether to close them or not before the ECB meeting.

In the end i decided to keep the positions open anyway. We'll see how it goes. I'll either get boosted into solid profit or in the worse case scenario get some minimal profit and lose everything in between.

I don't usually like to risk with things like this... but this one seems solid.

I dreamt of a eagle last night though... and that's pretty similar to a hawk... hawkish... as some "forex gurus" would say, it's a sign from the universe.

But i don't care about the signs from the universe, i'm putting my hopes in Draghi.

After all it's "Super Mario's" last meeting as chairman! I'm hoping he'll give the markets a gift for his departure.

FROM ECB MONETARY POLICY STATEMENT:

(1) The interest rate on the deposit facility will be decreased by 10 basis points to -0.50%. The interest rate on the main refinancing operations and the rate on the marginal lending facility will remain unchanged at their current levels of 0.00% and 0.25% respectively. The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.


(2) Net purchases will be restarted under the Governing Council’s asset purchase programme (APP) at a monthly pace of €20 billion as from 1 November. The Governing Council expects them to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates.

A tiered system has been introduced. This means that the rate you pay will depend on the ammount of capital you have:
(many opposed this)

(5) In order to support the bank-based transmission of monetary policy, a two-tier system for reserve remuneration will be introduced, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.

ECB has also said that the modalities of TLTROS will be changed.

(4) The modalities of the new series of quarterly targeted longer-term refinancing operations (TLTRO III) will be changed to preserve favourable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy. The interest rate in each operation will now be set at the level of the average rate applied in the Eurosystem’s main refinancing operations over the life of the respective TLTRO. For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III operations will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation. The maturity of the operations will be extended from two to three years.



All in all this is mostly in line with my forecast from yesterday. Now we should wait for Draghi's press conference, that matters most.

retail sales is tomorrow... think it'll bring the fire?

Depends on which market. I'll post a preview later. Currently i believe that retail sales will come in a bit lower then the forecast. If this does happen that will be negative for the stock market which keeps rising despite negative data. So i'm not sure if they'll start a fire or actually put out the fire of the current stock rally.

If they do come in lower that could provide a solid boost for gold though.

U.S. core consumer prices have posted solid gains recently but are likely overstating the amount of inflation pressures

Hi perma! You know retail sales always has market moving potential. I just looked over the last preview: US Retail Sales - August Preview. According to those impacts, it's worth previewing. I plan to get something posted sometime tonight. With all the ECB focus there hasn't really been much media coverage on retail sales. But it's going to be the only game in town tomorrow.

Looking forward to the preview!

I'm curious why you think Core CPI is overstating inflation pressures? I haven't heard anybody present that angle regarding inflation, particularly CPI. How'd you fare today with the ECB chaos?

Your forecasts were impressive. These two were notable surprises that disappointed the market.

The market was pricing in 15 basis points. That meant expectations were split. There were a lot out there believing they'd deliver a 20 basis point depo rate cut.

20 billion was lower than the 30 billion that was widely expected. While that disappointed, they may have made up for it by not setting a timetable. QE infinity?

Nice job Vorenzd, I'm long the S&P too. It came close to setting a record high today and I'm pretty confident it will in the next few days.

Thanks man, I apreciate it

Although QE was smaller then most analysts expected, the infinite QE did make up for it in my opinion. It's way more dovish then expected.

But this arises another question, what is really infinite? Remember that Draghi indicated that there was no discussion of raising the issuer limit as a way to boost the size of the pool of assets available to buy under QE.

The ECB can buy German bonds under its fresh €20b per month program for about 14 months. Here, Italy has the most most months left, at 87 while France, and Spain have 57 months and 25 months respectively. On the other end, Finland will have only five months of buying before limits reached while Slovakia has already hit the buffers.

According to my estimate at the proposed €20bn/month in QE (assuming a split of €5bn in corporate bonds and the balance in sovereign) QE can run for roughly 10-12 months under current limits.



Glad to hear this from you, it's very reassuring for my position. I hold you in high regard!

I'll try to follow the bulls for as long as I can, it'll be hard to find a good exit for this one. I'm carefully watching the capital flow and fundamental data to get a clue of when the run is nearing it's end.

Tomorrow is a Chinese bank holiday, Trump might try to boost the US equity market without boosting the Chinese counterpart (since the dust will settle until monday). China did the same with their timing of the release of the retaliatory tarrifs on 75Bn of goods from the US. So we might even see it tomorrow.
Ofcourse this is just one of my "random" opinions that has no base or evidence for it. So take it as such speculation!

Retail Sales • Friday 13.9.2019.

Retail sales started the third quarter at a blistering pace.

Total sales rose 0.7%, while “control group” sales, which excludes sales at gas stations, building material stores and restaurants, rose 1.0%. Overall sales were flattered, however, by the extension of Amazon’s Prime day. Therefore, I expect to see some payback this month, which along with lower gas prices should lead to only a scant gain in sales.

The August retail sales report will be poured over to gauge how consumer spending is faring in the wake of recent tariff threats and volatility in financial markets. Another solid report will be taken by the Fed as a signal that consumer spending is holding up in the face of global headwinds, and that the economy is not in much need of additional policy accommodation at this time.

A big miss, however, would raise concerns that consumer spending cannot sufficiently offset the headwinds from slower global growth and trade uncertainty, and add urgency for the Fed to ease policy further.

Previous: 0.7%

Personal opinion: 0.1%

Consensus: 0.2% (Month-over-Month)