Tightrope Talking [Video]

The Day So Far…

Yesterday saw yet another record close on Wall Street with the VIX closing below 10 for the fifth day in a row, which according to Deutsche Bank, is the longest such streak since the data began back in 1990. The FT were quick to run the headline this morning that the US tech sector within the S&P 500 has now past its dotcom era peak. However, to suggest that this may prompt an impending correction in the market maybe misplaced, as from a monetary policy perspective the environment is far different than it was 17 years ago, and when you look at equities on a more micro level, tech stocks now trade some 19.4 times 2017 FY earnings which looks extremely reasonable when comparing to the 73 times earnings that marked Q1 of 2000.

How far we can continue to push into uncharted territory is subject to debate but if there is one thing I’ve learnt post financial crisis it is that the road to normalisation is an incredible slow one with central banks acutely aware of the impact getting the timing wrong would create.

The most notable move in FX markets this morning has been in Cable where by a break of the post inflation print low on Tuesday (1.3031 futures) caused prices to shoot lower. The price action led many to believe that a weak retail sales report maybe forthcoming but they were left disappointed when the numbers far exceeded expectations causing a short-term reprieve for the pair. However, the recovery was short lived as when peeling away the layers of the report it became evident that retailers suggested warm weather in June was a key reason for the out performance on the month, a one-off factor then that does not detract from the broader expectation that UK consumers will continue to suffer in the months ahead amid higher prices and anaemic wage growth.

 

The Day Ahead…

All eyes now turn to the ECB where it will be the usual drill in that all three key rates are expected to be kept on hold (12.45pm) with the press conference with Mario Draghi (1.30pm) key to deciphering future policy direction. I personally feel today’s presser may cause large price swings in European assets as Draghi needs to walk a fine line between remaining confident on the prospects for the European economy but not pushing the envelope to far that market participants begin to fear a taper tantrum. Our reference point is the recent Sintra speech which was deemed very hawkish at the time of delivery and prompted a sharp rally in the EUR and associated yields. As such, the bigger trade today would be if Draghi feels the market has over interpreted his intentions given assets have a long way to retrace if that scenario materialises. Good luck!