Partner Center Find a Broker

The euro and the Swissy soared during and after ECB Overlord Draghi gave his speech. Meanwhile, the safe-haven yen got crushed even though risk aversion prevailed.

  • U.K. CBI realized sales: 12 vs. 4 expected, 2 previous
  • Fed officials will speak later, including Fed Chair Yellen

Major Events/Reports

ECB Overlord Draghi speaks (so listen)

Mario Draghi, the Supreme Overlord of the ECB, gave another introductory speech at the ECB’s annual forum on central banking earlier during the session.

Draghi first pointed out that:

“[M]onetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation.”

And we then got our first optimistic hint when Draghi said the following (emphasis mine):

These effects, however, are on the whole temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations.”

Remember, the ECB still has an easing bias on its QE program and has no plans to taper its QE program just yet because the ECB is not confident that the recent rise in inflation is sustainable.

Draghi’s comment that the factors weighing down on inflation “are on the whole temporary” is therefore pretty hawkish.

Moving on, Draghi then began praising the Euro Zone economy by saying that (emphasis mine):

“Though the euro area recovery started later than those in other advanced economies, we have now enjoyed 16 straight quarters of growth, with the dispersion of GDP and employment growth rates among countries falling to record low levels. If one looks at the percentage of all sectors in all euro area countries that currently have positive growth, the figure stood at 84% in the first quarter of 2017, well above its historical average of 74%. Around 6.4 million jobs have been created in the euro area since the recovery began.”

Of course, Draghi also praised the role of the ECB’s monetary policy on this recovery.

Draghi then said that the recovery “may be becoming more sustainable” because “for virtually the first time since 1999, spending has been rising while indebtedness has been falling.”

Draghi then expounded on why he thinks the factors that are weighing down on inflation are temporary before concluding that “reflationary dynamics” are “slowly taking hold.”

As such, the ECB now needs “to ensure that overall financing conditions continue to support that reflationary process, until they are more durable and self-sustaining.”

He then said that (emphasis mine):

“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”

That’s obviously a hint that the ECB  is ready and willing to “adjust” its monetary policy bias if things continue to improve in the Euro Zone, although Draghi does not want to refer to such an action as tightening.

Also, Draghi gave his usual warning and caveats that “there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery,” adding that any adjustments “have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.”

Commodities extend gains, oil outperforms

Commodities continued to march even higher during today’s morning London session, with oil leading the way

Precious metals were back in the green after getting kicked lower yesterday.

  • Gold was down by 0.43% to $1,251.80 per troy ounce
  • Silver was down by 0.30% to $16.621 per troy ounce

Base metals broadly climbed higher.

  • Copper was up by 0.09% to $2.641 per pound
  • Zinc was up by 0.84% to $2,733.50 per dry metric ton

Oil benchmarks very clearly outperformed.

  • U.S. WTI crude oil was up by 1.06% to $43.84 per barrel
  • Brent crude oil was up by 1.28% to $46.63 per barrel

Today’s broad-based rise in commodity prices was likely sustained by the weaker U.S. dollar, which made commodities relatively more attractive to buy.

And for reference, the U.S. dollar index was down by 0.55% to 96.58 for the day when the session was about to end.

As to why oil outperformed, market analysts pointed mainly to Greenback weakness but they also cited short-covering after over a month of sliding oil prices. No catalyst for the short-covering was mentioned, though.

Risk aversion returns

Yesterday’s optimistic start had no legs to stand on it seems, since risk aversion returned during today’s morning London session.

  • The pan-European FTSEurofirst 300 was down by 0.37% to 1,524.16
  • Germany’s DAX was already down by 0.44% to 12,713.50
  • The blue-chip Euro Stoxx 50 was down by 0.50% to 3,545.50

U.S. equity futures also got weighed down by the risk-off mood.

  • S&P 500 futures were down by 0.10% to 2,433.62
  • Nasdaq futures were down by 0.45% to 5,752.12

Market analysts blamed the returning risk-off vibes on souring sentiment because of dropping auto shares after Germany’s Schaeffler downgraded its outlook on the company’s future profitability.

Global bond yields surge

Bond yields actually spurted higher during the session, even though the European equities and U.S. futures markets were pointing to risk aversion domination.

  • French 10-year bond yield down by 10.92% to 0.673%
  • German 10-year bond yield down by 24.50% to 0.309%
  • U.K. 10-year bond yield down by 4.84% to 1.062%
  • Canadian 10-year bond yield down by 2.19 to 1.496%
  • U.S. 10-year bond yield down by 1.39% to 2.167%

Market analysts say that bonds yields surged despite the risk-off vibes because of ECB Overlord Draghi’s comments.

Major Market Mover(s):

EUR & CHF

The euro and the Swissy got a boost during and after Draghi’s speech, very likely because of the surprisingly hawkish tone, which contrasts with Draghi’s more dovish speech from yesterday.

EUR/USD was up by 82 pips (+0.73%) to 1.1269, EUR/JPY was up by 117 pips (+0.94%) to 126.13, EUR/AUD was up by 104 pips (+0.70%) to 1.4815

USD/CHF was down by 69 pips (-0.71%) to 0.9657, GBP/CHF was down by 61 pips (-0.49%) to 1.2316, NZD/CHF was down by 55 pips (-0.77%) to 0.7051

JPY

Risk aversion was the dominant sentiment during the session, as gleaned from the slide in European equities and U.S. equity futures. Even so, the yen ended up as the worst-performing currency of the session, very likely because the yen got pulled down by higher bond yields.

USD/JPY was up by 25 pips (+0.23%) to 111.93, CAD/JPY was up by 42 pips (+0.51%) to 84.71, CHF/JPY was up by 115 pips (+1.00%) to 115.90

Watch Out For:

  • 1:00 pm GMT: S&P/Case-Shiller Composite HPI (steady at 5.9% expected)
  • 2:00 pm GMT: CB’s consumer confidence index (116.1 expected, 117.9 previous)
  • 2:00 pm GMT: Richmond U.S. manufacturing index (4 expected, 1 previous)
  • 3:15 pm GMT: Philadelphia Fed President Patrick Harker will speak
  • 5:00 pm GMT: U.S. Fed Chair Janet Yellen will deliver a speech
  • 9:30 pm GMT: Minneapolis Fed President Neel Kashkari has a speech