June 5. ECB meeting to increase financial speculation?
–ECB today expected to introduce a negative deposit rate and host of other stimulus measures. This, at the same time many Fed officials are wringing their hands over financial stability and excessive reach for yield. In a way, moves by the ECB could spur a flow of funds into US assets, further compressing spreads that the Fed is concerned will sow the seeds of the next disaster. But rather than raise rates here, the Fed appears to be relying more on increased regulation to stifle excess risk. For now. Which probably also contributes to smothered volatility.
–The easy trade would appear to be a steeper curve and lower EUR. And indeed the market is leaning that way. For example, there was a buyer of 30k TYN 123.5/122.5 put spreads yesterday for 13, and EUR is hovering around 136, hoping Draghi will provide an excuse for the next leg down. However, ultimately Draghi needs help in the form of stronger US growth, which makes Friday’s employment report loom a little larger, and ADP data yesterday was a bit softer than expected. IF employment data turns out to be weak, another rally in bonds will be violent and painful, and would probably also clean out some EUR shorts.
–It also doesn’t help that China is having continued issues with its shadow finance system. Story on ZH yesterday says that “there is a discrepancy in metal that should be there and metal that is actually there.” Which in this case is copper and aluminum, commonly pledged to secure cheap financing with which sophisticated players can invest in higher yielding assets. Or play the ponies. The problem of course, is when the same metal is pledged over and over again in order to pyramid into financial assets. Then, poof. It’s gone.
