MidSession Review: The lion's den

In few hours Mr Draghi will enter the lion's den, the ECB chief will brief members of the Budget, Finance, and European Affairs committees plus any other “interested representatives” in a closed session from 1:45 p.m., according to a statement released by the German parliament. A press conference is scheduled for 4 p.m. The reason for this sales pitch is to seek popular suport in Europe's largest economy for his up to now just “spoken” bonds buying programme. We need to bear in mind that while Draghi thesis is that the Outright Monetary Transactions are necessary for price stability, some German policy makers see them as an affront to the monetary orthodoxy upon which the ECB was founded.

Today's European macroeconomic data could support Mr Draghi pitch as activity in Germany's manufacturing and service sectors declined for a sixth straight month in October, pointing to a stagnation in Europe's largest economy. (German Manufacturing PMI reading came in at 45.7 versus 48 expected, previous was at 47.4; German Service PMI was at 49.3 versus 50 expected and 49.7 prior). The survey for the whole 17-nation euro zone bloc followed the German component, falling to 45.3 on the manufacturing side and 46.2 on the service side, expectations were for 46.6 versus 46.1 at a previous reading and 46.2 versus 46.5. A separate reading in Germany conducted by the IFO found that business sentiment had also dropped for a sixth successive month in October to levels below even the weakest of forecasts: the reading came at 100 versus 101.5 expected and 101.4 prior.

Readings pressured the common currency which is trading, while we write, at 1.2943$ or 0.42% lower versus the greenback, dropping below Tuesday's low of $1.2952. The currency move did not flush equity indexes which were trading along the flat line.

The Stoxx50 rose 0.18% to 2,484.46, the German Dax was flat at 7,173.64, in Southern Europe the Spanish Ibex led gainers up 0.28% to  7,769.30 and the Italian Ftsemib rose 0.22% to 15,613.62 as traders were respecting the rule: “do not fight Mr Draghi”.

By the way the gloomy European data did encourage buying of German government bonds still considered by the most as safe-heaven, sending the yield on 10-year Bunds down 2 basis points to 1.56 percent just ahead of an auction for 4 billion euros of new September 2022 bonds. Spanish government 10-year bond yields were on the rise again to 5.6680 or 2.80 bp higher.

So at the moment we got: falling Euro, rising Spanish yields and rising equity benchmarks, something is wrong!

Let's have a look to the commodity space for hints:  Gold is trading along the flat line at 1,710.30$ an ounce and Oil (WTI) is up 0.25% to 86.69$ a barrel therefore the rising dollar is unable to clash buyers. Rising Oil points towards rising equity benchmarks therefore if nothing change we could expect a rising euro and falling yields to close the cross asset divergence. But remember we are deling with probabilities nothing is certain here, a single headline can change the overall picture.

The question now is which asset will be the compass today?  for sure headlines will be the driving forces but as usual we do not need to react to news but we need to follow our plan.

Originally posted at www.77sigmatrading.com