Fears about Banco Espirito Santo (BES) one of Portugal’s largest banks did some damage to markets yesterday. Stocks were lower, EUR/USD dipped back below 1.36. It seemed like we were back to 2012 and with concerns about the health of European financials, but look where we are this morning – it’s like it never happened. Had this been back a couple of years ago – before Draghi put his foot down – the panic would have been feeding on itself by now, with senior figures across Europe announcing emergency meetings. But this isn’t 2012, this is 2014, and Draghi has been extraordinarily effective – a central banker not to be messed with. It seems clear the short term players were short euros when the rumours about BES got out, thus the dip was an opportunity for those guys to get out, take a step back and wait for better levels to get back in.
Yes the trend for EUR/USD looks to be down, but I’m guessing the smart guys will wait for the panic sellers of yesterday to capitulate and stop out of their positions. Where that level is could be 50 or so pips higher than where we are, it’s hard to be precise, but my sense is that there are stops a bit higher than where we are now. What that means is we should probably see higher levels today, but it will be a very short term thing with the pair moving back to pre- BES levels in short order. Personally I prefer EUR/GBP for expressing a short euro view… you take the dollar out of play. I wouldn’t be expecting major things to happen over the summer months though, it tends to be like that unless we’re in crisis mode. And it seems like Portugese banks are not enough to do more than momentarily perturb the market now.
In my view, we need to look out towards events like Jackson Hole in August – the annual economic symposium where central bankers often make key speeches; and the return of the big players from their holidays in September, for the market to make an assertive move in one direction or another. We could be in for a directionless market until then with ranges large enough to discombobulate, but not so big it makes us question the dominant narratives.