The markets turn risk-averse after the ECB reduce the PEPP

The reduction in PEPP should not be seen as tapering according to the ECB governing council. It is an emergency program that is coming to an end. There is still much work to be done to get the European economy on track to meet inflation targets and employment goals. The US traders seem to be worrying about a knock effect of tapering as they have moved into the safe-haven currencies and have increased their Treasury holdings.

Market Wrap

Central bankers are closing the trading today adding some volatility into the markets with their views on the economy ahead of the Federal Reserve blackout period. The day had started with traders waiting for the ECB monetary policy decision which came in as traders and analysts had largely expected. The ECB rate stayed unchanged, and the Pandemic Emergency Purchase Programme was slightly reduced.

At the time of writing extra volatility came into the markets due to a big, long-dated US Treasury Bond auction. The sale was $24bln 30yr Bonds with a Bid-to-Cover at 2.49x, which is above the 6-auction average of 2.28x. This increasing Bid-to-Cover shows greater demand for the long bond and hence why the TLT rose sharply.

From the chart above I left the level the TLT was trading at when Fed Chair Powell started speaking at the Jackson Hole symposium and you can see there was an increase in the TLT as no word of immediate policy tightening. The TLT then proceeded to sell off as the US dollar found support and yields went higher. After today’s auction, we’re back towards the highs of the last week or so and equities took a tumble.

The above chart is the Nasdaq which up until now had been the last of the indices I follow to remain green for the session. I mark up every day the range traded in the first hour of the US session, as the Nasdaq often trades to at least 50% beyond that range. Very rarely the price action makes a measured move and if it does can be the market overextended for the day with a return to the initial range. With such a strong move into the fixed income markets, there could be a rotation out of riskier assets as long bonds are often the go-to asset for safety when there is market disarray.

US EIA weekly crude stocks show less of a drawdown than expected.

The WTI crude contract is down -1.15% today even though the US dollar is also down -0.30%. so the lack of demand is worrying the markets here, even though the consensus is the oil markets are tight and the disruption from hurricane Ida was the worst in recent history, if not ever.

In good news, the US initial jobless claims came in much better than expected. The previous week's level was revised upwards by 5,000 climbing to 345,000 but the 4-week moving average declined by 16,750 to an average of 339,500. Expectations had been for 335k so this is going some way to helping the Fed’s argument that jobs data should pick up over the coming months. This reading is the lowest since March 2020.

The British pound has taken advantage of the weakening US dollar and is up 0.55% today. As the ECB is not tapering but recalibrating the PEPP over the next 3-months it will be interesting to see how the market digests this. Currently, the euro is stronger for the day, which is pushing on the US dollar index, which in turn is giving Cable a nice bid.

The risk-off sentiment in the market as seen in the selloff of US equities and the rise in fixed income is also highlighted in the strength of the Japanese yen and Swiss franc compared to the likes of the Australian dollar and Canadian dollar.