First it was Europe that was mired in its coldest deflationary winter ever, then America promptly caught on. It was only a matter of time when cheap energy prices claimed its next victim - Britain. Unlike the Eurozone whose February CPI change settled at -0.3%, the UK saw no change in its price index from a year ago, missing estimates of a 0.1% rise and down from January's 0.3% change. The core figure (excluding food and energy) missed expectations of 1.3%, coming in at 1.2% from January's 1.4%. The market collectively expects deflation to officially strike in March. This comes on the heels of the BoE's Governor Mark Carney's comments about inflation dropping below zero in the next couple of months. Earlier in March, the Bank of England's MPC voted to keep interest rates at a record low of 0.5%, but foresaw a rate hike somewhere in 2016. The BoE is expected to trail the Fed in terms of monetary policy.
Oil prices are at a major inflection point. They either turn higher or break multi-year support levels and cause more pain to oil producers.
Nearly 2 months ago, we put out a note describing how we speculated on the upside of crude oil prices. We then subsequently implored if prices had indeed bottomed, and we made a case for both sides of the trade. Regular readers that follow our trades that we make public, will know that from the period spanning 1/27 till today, we have had 5 trades on oil. The results of these trades can be found in our most recent commentary dated 3/10.
In this note, we will share with readers a few takeaways we have gained, as well as what we expect going forward.
The time from when we last published our latest addition of the Daily Grail has been rather eventful. From the blistering jobs report 2 weeks ago that propelled market's expectation for a June rate hike even higher, to the continuation of monetary policy bifurcation by the world's central banks that will soon see the Euro trading at par to the Dollar, the month of March has so far endowed the financial markets with much needed cross-asset volatility.
On 22 January, the ECB unveiled something the world had never seen before. Mario Draghi, President of the European Central Bank, announced that for the first time in the 14 years of the Euro's existence, the ECB was going to monetize debt securities to the tune of €60bn/month. Just 2 short months ago, the ECB termed this open market operation the EAPP (Expanded Asset Purchase Program).
2 months and 1000 pips later, the ECB has coined a new term - the PSPP (Public Sector Purchase Program).The big question on the minds of currency traders across all trading desks is when will parity be attained on EURUSD. Not if but when.
We spoke, we warned, and it has now happened. For reference, we have included a bevy of links documenting our explanation of why deflation was going to be the elephant in the China room.
With the significance of this being the first deflationary headline figure 6 years after Lehman collapsed, low oil prices have conveniently been cast as the straw man. There is some truth to this - the energy index fell 9.7% while the gasoline index fell 18.7% in January, both over December. This marks the fiercest plunge in the 7 consecutive negative prints; the report also noted that the decline in the gasoline was "overwhelmingly the cause" for broad weakness in overall prices. When annualized, the energy index and gasoline index fell 19.6% and 35.4% respectively. Staggering figures!
Everyone certainly knows about the blockbuster Disney animation film "Frozen" and its plot. Though we realize, rather humbly indeed, that we will never come anywhere close to Chris Buck's eloquence in personifying fictional fantasy, we nonetheless were able to connect the quaint dots of what was one of the most popular movies of 2013 & 2014, and that of the biggest stories of the global economy.
We liken Elsa to global oil prices; once the innocent commodity everyone vied for has now become the harbinger of disinflation and deflation, causing great pain and blowing a bone-chilling deflationary wind across much of the world. Anna (Elsa's beloved sister), which we liken to central banks, embarks on a journey of wanderlust and real purpose to try to rescue her dearest sister who has uncontrollably morphed into an Ice Daemon.
Once in the bliss of a dearest sisterhood with Elsa - like central banks were to elevated asset prices, Anna now frantically embarks on an unprecedented journey of uncertainties to save Arendelle from an eternal ice age - like central bankers are now embarking on extraordinary monetary programs to reverse the unintended consequence of their previous misdeeds.
What a way to start 2015. The first deflation in the EU since 2009, record low yields on German sovereign debt, global energy prices keep tanking, US equities down for 5 consecutive days, and the news (or not) keeps flowing. For the record, major equity indices have started 2015 with the worst performance since the financial crisis of 2008. Whatever remnant of the 2014 "Santa Rally" turned out to be a ghost in a shell, and has now spooked global market participants.
The past week has been all about ratcheting up the "Grexit" rhetoric across the markets. Readers should be no stranger to the situation in Greece and the entire periphery of the Euro Union, which we touched upon in our last update preceding the New Year. The risk has indeed never been greater as it seems Germany has openly voiced that it won't be blackmailed by a Greek plunger. Remember, Greece is bounded by €240bn to the Troika under the various bailout packages extended to her.
The S&P 500 index closed at a record high of 2083 at Friday's close, capping what has been an ebullient Christmas week where equities have historically enjoyed outsized returns relative to volatility. Indeed, the S&P 500 was joined by the Russell 2000 index of stocks and the DJIA (Dow Jones Industrial Average of 30 stocks) to close Friday at their respective record highs.
Trading volumes have been thin across the board, perhaps not so in China where people apparently are told not to celebrate the festivities of Christmas, as markets there remained opened for the entire week. Apart from American markets, the Shanghai Composite surged to a record high this past week. Reason? Mainstream media has been blaring more stimuli from the PBoC. If indeed true, that the PBoC is indeed gearing up for more stimulus come 2015, it would indeed be trying to balance a very tricky scale. Readers will recall that earlier in December, the PBoC reigned in on shadow banking by tightening collateral rules; and now wants to prop up asset prices by introducing more stimulus via other conduits? Seems like some central bankers over there are a little confused on what they actually wish to achieve with their Schrödinger policies.