Good morning

Stocks globally have taken an almighty pounding aided in part to yesterday’s weak US ISM Manufacturing index. Truth is this was just one reason among many that can be attributed to the recent turmoil in global stocks. Ebola, Ukraine, ISIL, ECB, US Secret Service, Bad hair day, a disappointing economic number, CRAZY IPO prices (Alibaba etc.)…the list goes on and on. Journalists (writing about it) and traders (trading it) alike are using any excuse to trim positions and take profits. The moves have been nothing short of spectacular with the Nikkei down a whopping 2.6% o/n in line with the rest of the world. S & P down 3.50%, Dow down 4.5%, FTSE down 4%….list goes on and on. After an eye watering rise, the markets have rebelled and found reason to unwind. Commentators and experts alike have all commented on the recent fall, and what we can expect to see next….but truth be told no one really knows. With a 10 fold increase in geo-political risk and uncertainty, as the saying goes, cash is king!! Maybe that the one and only reason investors are moving into cash.

Fed policy normalisation vs. continued or further easing from the BoJ and ECB are themes that have been widely responsible for the shift in investments. However, it was really in September that the market started to price in the divergence story more seriously. During July and August, the effect was largely confined to FX and rates, with the dollar rally picking up pace and short-end rates edging higher. However, following ECB easing in September, we started to see a clearer market reaction to the divergence theme. US and EM equities, the indices considered to be more sensitive to Fed normalisation, sold off. The dollar rally also became more broad-based, rallying against EM FX, as well as the majors such as the EUR, JPY, AUD, CAD, NZD & ZAR. As I have noted above, global uncertainty is forcing investors out of stocks (and to a degree bonds) and into cash and more specifically the USD. Even this morning after everything we have seen the USD is trading at EURUSD 1.2625 (high 1.2675), GBPUSD 1.6200.

Talking about the ECB, I CANNOT STRESS the importance of today’s meeting and resulting press conference. So much is riding on what pres. Draghi will have to say and more importantly what they at the ECB propose in terms of policy and Asset Backed Securities (ABS) repurchase. So what can we expect today:

1. Details on ABS: Draghi may lay out a timetable, and offer the market more insight into what instruments they will dive into.  I would imagine he might give us an idea about the SIZE, though I should warn that If he does mention a number and it’s big, the result is likely to be EUR positive while small size (recent LTRO of €85bn) is EUR negative. Without a number, the markets will probably be disappointed and sell the EUR.
2. View on inflation: Inflation is at rock bottom levels. Draghi is likely to continue denying deflation because any hint of it and the EUR gets hit
3. LTRO: In Spain, a better lending environment is already reality. However as we all saw, the disappointing TLTRO take up sent the EUR lower and so he must tread carefully
4. View on the EUR: Since June, EURUSD has fallen over 9%, and over 5% vs the GBP. Draghi is probably smiling inside (after all he did say the EUR was too strong and needed to fall). However, the ECB doesn’t officially have an exchange rate target, and Draghi is likely to be very careful here. As he has stated (AND PARITYFX MANY TIMES) a lower EUR is necessary to lift inflation, lift exports thus making EU goods more competitive and reducing the need for QE.  ParityFX has called for EURUSD value of 1.2000 by DEC 31, and I for one DO NOT SEE this as being an issue for the ECB to stomach. Draghi is letting global events and a re-positioning of global assets (including ECB LTRO and monetary policy changes) to drive the EUR and in so doing help his cause.  

Overall then it is my opinion that stocks will start to bottom out, with hot money investors likely to start looking for opportunities to turn the recent red tide around. Furthermore while the EUR could see occasional signs of life, the writing is on the wall and a continuation of the USD rally will continue until my target has been reached. That my dear reader means GBPUSD sub 1.6000 and EURGBP topping 0.7700 (1.3000). Looks like your holiday to Europe just got 5% cheaper since the end of the summer….6% -8% if you deal you FX with PARITYFX!!

Wishing you a good day ahead