He who gives life can take it away. This very much seems to be the motto of Draghi and Co. and will be fresh on the minds of investors when the ECB President speaks later today at the press conference. The ECB is all but certain to keep policy on hold today and I would expect some dovish comments to be thrown in around the amplifying global trade battle between the US and the rest of the world. Last month the ECB decided to end its €2.6trn bond buying scheme to the end of the year, at least they did initially until Draghi added that it was still possible to extend QE. However some soft readings from Germany in recent months has left markets skeptical of their forward guidance, particularly with their summer 2019 rate hike guidance (markets not pricing this in until December 2019). Most euro area bond yields edged down in yesterday’s trading session as traders sought some safe haven assets in the lead up to today’s event.
Yesterday’s meeting between President Trump and European Commission President Jean-Claude Juncker couldn’t have been more timely for the ECB, as it looks to have eased fears of a trade war. Both parties agreed to refrain from imposing car tariffs, while negotiated to cut other trade barriers. However US import tariffs of 25% on steel and 10% on aluminum will remain in place. The apparent break through here saw trader’s appetite for euro increase, bouncing from daily lows of 1.1664 to highs of 1.1742 overnight. We may also see further dollar weakness as the risk of a transatlantic trade war reduce with the dollar been bought as a safe haven over the past couple of trading sessions. This risk off environment can be seen in the US 10 yr as it approached 3%, and up 12bps from last week.
Dollar strength is also vulnerable to comments by Trump around future rate rises and a strengthening greenback. Trump regularly associates a strengthening S&P down to his administration, where he now argues that rate rises were tempering the effects of tax cuts, thereby negatively impacting corporate returns. Powell now finds himself in a difficult position with this added external pressure from Trump while the internal debate among FOMC members around the shape of the yield curve remains unresolved. Historically a flattening yield curve has signaled an impeding recession but with QE, the extended period of ultra-low rates coupled with trade tensions it is probably too early to jump to such rash conclusions.