Traders blaming their losses on Draghi might want to look at themselves.....

Friday 4th December 2015

Traders blaming their losses on  Draghi might want to look at themselves.....

All outlets, everywhere.

Well, in the end it turned out to be quite a day ..... Did we mention yesterday that anything other than decisive action by the ECB would disappoint the markets ? Plainly, a cut in the deposit rate by just 10 basis points to -0.3% and a six-month extension to its QE bond-buying programme (crucially without any increase in the amount of the monthly purchases) does NOT qualify as "decisive". After the announcement, the Euro rebounded 3 cents against the US$ to 1.09, the biggest one-day rally for 6 years, and  equity markets tanked .... Germany's DAX and France's CAC40 were both off about 3.5%. European bond yields spiked (and prices fell) with yields on German Bunds from 2 to 10yr jumping about 20 basis points.

There are some this morning who are keen to blame ECB boss Mario Draghi and his colleagues for a failure in communication, the suggestion being that the markets had been led to believe that more stringent action was to be taken. Excuse us, but we don't remember Mr Draghi or any other top official hinting at a 20bp cut in the discount rate say, or an additional 30bn euros per month in bond purchases. "Super Mario's" bold actions in the past may have led traders to convince themselves that something similarly aggressive was in the pipeline, but that's hardly his fault. It strikes us that the ones doing the complaining are the ones who have lost money. Quelle Surprise ! ... it was ever thus.

Following the trend and getting yourself short euro / long US$ and long European stocks and bonds in expectation of some dramatic easing was one plausible way of looking at things, but there was always a case for something a little more cautious. For one thing there is a significant minority element within the ECB (led by Germany) that is particularly uncomfortable with the idea of further easing. There's also the likelihood that acting with restraint now allows the ECB to keep some powder dry in case it needs to add further stimulus later. So, the arguments for both eventualities were always there and bloodied traders should not be so quick to point the finger at somebody else if they misread the signs.

****  NOTE  :  There is a suspicion that some traders still believe that it is within the remit of central banks to support asset prices. This goes all the way back to the Fed's Alan Greenspan and his legacy on that front does no one any favours, but you could argue that central bankers of a more recent vintage may have given the same impression. Anyone subscribing to that theory should get it out of their heads immediately  ---  the desire to avoid market TURMOIL may influence decisions, or at least the timing of them, but no central banker should be concerned with boosting market performance. It is categorically NOT THEIR JOB.

So what's on the agenda for today ?

US November employment data for one thing : Non-farm payrolls consensus estimate 200,000 (October 271,000) , Headline unemployment rate consensus 5.0% (Oct 5.0%).

For us at least it's hard to imagine just how bad the jobs numbers would have to be to deter the Fed from lifting rates on Dec 16th, though we have to acknowledge that futures markets suggest there is still about a 1 in 4 chance that they won't.... (really?).  We did hear that a payrolls number of less than 100,000 with a big downward revision to October's number might be enough to make them reconsider. Even if that unlikely scenario should come to pass, in our humble opinion the Fed will still have to act if it wants to maintain any credibility  --  not to act really would be a case of poor or even misleading communications. What such poor data  probably would do though is to reinforce the idea that this is going to be a slow and gradual rate-rising cycle. Bloomberg TV this morning referred to Toby Nangle of Columbia Threadneedle and his description of what happened with the ECB yesterday and what's likely to happen with the Fed in 12 days time as a "hawkish cut" and a "doveish hike". That sums it up pretty succinctly.

Look out also of course for news coming out of the OPEC meeting in Vienna today. Yesterday was all about Saudi Arabia being willing to cut production only if other non-OPEC nations (eg Russia, Mexico) did the same. There are plenty of other problems besetting OPEC, not least how are they going to accommodate post-sanction Iranian production, and the game of "I will if you will" (cut production, that is) is likely to go the way of many before it. So, no change likely from OPEC and no obvious relief for the oil market ... BUT, those on the scene are talking of a change in policy being possible relatively early in 2016. One never knows how much credibility to give such talk .... history is littered with similar empty promises but it may make long-term oil bears take notice.