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ECB policy: Less dovish does not mean hawkish

Last week, Mario Draghi announced that the ECB would drop the commitment to increase its bond-buying programme should “the outlook become less favourable” – a pledge dating from December 2016 when the ECB first began to cut its bond-buying programme.   This pledge was widely considered to be the ECB’s signal to the markets that it had a dovish bias and so its removal last week was important, as in some ways it represents the first step towards European monetary policy normalization.


As such, you might have expected the euro to strengthen on this announcement - maybe even break through the stubborn 1.25 resistance level which has held back EURUSD in recent weeks.  And while the EUR did strengthen briefly, it quickly dropped over a cent, with EURUSD settling around the 1.23 level. 


There are a couple of explanations for the euro’s counterintuitive price action.  First of all, this is a classic “sell...

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Cracks in the Foundation

It is said that a building is only as strong as its foundation.  If we imagine a country’s economic output as a building, the foundation it would be built upon is that country’s consumer.  Consumer spending makes up over 50% of GDP in every major developed economy (69% in the US), so if consumer spending falters, OR if the money spent by that consumer fails to benefit the local economy in terms of jobs and productivity, then the building’s foundation weakens.


Over the past 5 or 6 years, consumers have been on a spending spree fuelled by low borrowing rates, which has provided a solid base for these GDP skyscrapers.  However, recent developments bring into question whether these are skyscrapers, or just a series of Jenga towers.


With wage inflation virtually non-existent, where has the money come from that consumers are throwing about?  Debt.  With interest rates near zero, the consumer has...

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Is the panic over?

Less than three weeks ago, the VIX index (the Chicago Board Options Exchanged S&P 500 Volatility Index – also known as the Fear Index) spiked to its highest level since August 2015 amid concerns of rising bond yields and expectations that the world’s central banks are likely to tighten monetary policy. Global equity market slumped around 10% as did oil prices, while the dollar rallied as traders rushed towards the safe haven of US treasury bonds. Although most analysts were in agreement that risk assets were looking over inflated and vulnerable to a correction, the speed at which the sell-off unfolded triggered alarm amongst money managers.


Chart 1 – VIX Index (2013 – 2018)


Source: Bloomberg


Looking at the markets this morning, European equity indices are a sea of green after a strong US session on Friday. Granted most indicines have only recovered around a third of their losses so far, but the...

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