DXY was firm overnight as CNY popped but EUR sank:
The Australian dollar lifted against DMs:
But could not keep pace with EMs:
Gold tried again to break out:
Big miners jumped:
EM stocks jumped:
High yield jumped:
The Treasury curve was trashed:
Bunds went nuts:
Aussie bonds went nuts:
Stocks went nuts:
Two causes, very easily identified. First, the ECB’s Mario Draghi went all in:
The prolongation of risks has weighed on exports and in particular on manufacturing. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.”
“The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate – and we will do so again to answer any challenges to price stability in the future,” Draghi said.
MOAR stimulus coming.
Second, El Trumpo announced a long meeting with El Xio, via Bloomie:
The U.S. and China said their presidents will meet in Japan next week to relaunch trade talks after a month-long stalemate, triggering a rally in financial markets.
President Donald Trump said Tuesday that he had a “very good” phone conversation with Chinese counterpart Xi Jinping. The two leaders will hold an “extended meeting” at the G-20 summit on June 28-29 in Osaka and “our respective teams will begin talks prior to our meeting,” Trump said on Twitter. The U.S. president had repeatedly threatened more tariffs if Xi spurned the opportunity to talk.
Normally, ECB easing would be bad for risk. It means a lower EUR and higher DXY which actually cuts off capital flows to the emerging market and commodity complex. But markets are probably taking it as a sign that the Fed and PBOC will follow.
And the trade war news swamped such calculus anyway. A cessation of trade hostilities will lift all boats so it was simply time to buy everything.
Ironically, the news struck as the BofAML monthly money managers survey showed the most bearish posture since the GFC, which no doubt added short covering fuel to the fire:
BofAML FMS bottom line: June FMS most bearish survey of investor confidence since the Global Financial Crisis; pessimism driven by concerns over trade war/recession, monetary policy impotence, low strike prices for policy puts; tactical “pain trade” is higher yields & higher stocks, especially if Fed cuts 25bps Wednesday.
BofAML Bull & Bear Indicator: drops to 2.3 from 2.5 with June FMS inputs; contrarian “buy signal” of 2.0 thwarted by resilient credit market inflows & prices.
Cash bulls: FMS cash level soars to 5.6% from 4.6% (Exhibit 1), biggest jump in cash since 2011 US debt ceiling crisis.
Equity bears: 2nd largest drop in equity allocation ever (largest occurred Aug ’11); and FMS relative allocation of equities over bonds drops to lowest since May ’09.
Macro bears: global growth expectations plunge by largest amount since the Nov 1994 FMS (“Tequila crisis”); 2nd biggest ever drop in EPS expectations; record number of investors say economy “late-cycle”; trade war “fear” highest since Jul ’18.
Fed bears: in just 8 months,the percentage of investors expecting higher short rates has flipped from 89% to -10% (lowest since 2008); yet doubts over impact of lower rate growing…monetary policy impotence jumps to #2 “tail risk”.
Policy bears: FMS investors have low strike prices for both the Fed put & the Trump put…S&P 500 level at which investors expect Fed to cut = 2430, at which Trump cuts comprehensive trade deal = 2350.
Crowded trades: long US Treasuries becomes #1 “crowded trade”; US dollar “overvaluation” highest since 2002.
Bearish rotation: FMS shows huge June rotation to bonds, cash, staples, utilities, and huge rotation away from equities, banks, Eurozone, tech.
Trades for the contrarian bull: “long gold, short US$”, “long stocks, short Treasuries”, “long Eurozone, short EM”, “long banks, short utils”, “long energy, short discretionary”.
The only problem is, at least according to fundies, the Fed won’t cut unless stocks are much lower:
And so we return to the bad news is good news paradox. Why would the Fed cut when the trigger is lower markets which have risen on the Fed cut! But how can it not do so now that markets have priced it?
Anyways, the takeways are that the AUD would normally keep falling if the ECB is as aggressive, or more so, than the Fed. But so long as we get better signals on the trade war then the AUD will be better supported. It is anybody’s guess how that will play out.