US Jobs and Draghi's Put

by Ashraf Laidi

One day after the ECB delivers the biggest "easing" policy move since the Eurozone crisis, the US economy shows it has recovered all non-farm jobs lost after the 2008 recession, while posting the first 4-consecutive monthly NFP increase of +200K in more than 14 years. These could well be the key factors fueling the next run-up to global equities into Q3.

Bigger ECB Easing is not Cheaper Euro

Draghi's decision to slash deposit rates below zero and the refi rate to 0.15% as well as the introduction of €400 bn in 4-year targeted LTROs is aimed at averting a sovereign debt default, or driving down sovereign yields. As loan demand is set to grow to the extent of creating a reliable asset-backed securities market, the ECB should likely succeed in avoiding Japan's liquidity and disinflation trap.

Bond funs already investing in Eurozone corporate and sovereign debt will be joined by sceptical allocators, which will only maintain support for the euro. More importantly, absent any concerns with sovereign debt woes in the Eurozone, the single currency will remain boosted by favourable "real" yield differential relative to the US in the 2-year space.

The first chart below illustrate how higher "real" yields in the UK have explained GBP's outperformance versus the major currencies thanks to its superior two-yield differential after inflation. Since US yields are not high enough to compensate for the higher inflation differential relative to the euro, USD unable to garner any gains vs the single currency. Thus, as long as US yields fail to rise in tandem with the upward creep in inflation, the EUR-USD inflation/yield differential shall remain a problem for USD bulls.

Draghi's equities bazooka

Unlike the Greenspan & Bernanke "put", which occurred during fierce equity market selloffs in 1998, 2001 and 2009, or Draghi's LTRO interventions in 2011 and 2012, which emerged during political disarray in Italy, 80% declines in the value of Greek debt, or even a 15% selloff in the Dax, this week's ECB bazooka, aimed at load creation has come during new highs in global equities and macro stabilisation in the Eurozone. Even Spain and Greece PMIs are well above 50. And if there were any doubts that the Eurozone shares discount relative to the US was starting to wane, Draghi's credit-focused bazooka may delay any such cautiousness.

global markets, june 6

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