Since the beginning of the European session on Friday, the market mood has certainly improved.
And now it seems that nothing can stop markets, even significantly bad news. Or perhaps the faith in central banks is returning and bad news is becoming good news?
Some of this correction can be explained by a correction to the exaggerated doom and gloom that caught markets throughout last week before Friday: the BOJ failed at pushing down the yen, worries about European banks, the fall in oil prices and even Janet Yellen’s soothing words failed to cheer markets. It seemed like the faith has been lost not only about the global economy but also central banks seemed powerless.
It’s not all bad
But on Friday things improved: it was exaggerated perhaps, especially the worries about European banks. Even if you are genuinely worried about Deutsche Bank’s position, do you think the German government will let it fall? And commodity prices falls also have an upside for quite a few countries. The better mood was then fueled by better than expected retail sales figures in the US.
But data on Monday was already sour: the Japan economy just cannot grow continuously: a worse than expected contraction in Q4, of -0.4% does not look good. But wait, this may add to the case for more stimulus from the BOJ (only two weeks after the negative rates), so perhaps it’s good?
And from the third largest economy to the second largest, China: after a week long holiday, China came back online and reported terrible trade balance figures: worse than expected drops in both imports and exports. This cannot be good for the global economy, can it? Well, also here, this may result in stimulus from the economic giant, and that’s not so bad for anybody.
Draghi and Fed minutes next up
The next thing on the agenda is Draghi’s testimony: he may revive the faith in himself as Super Mario after disappointing markets in December. Why? First, it’s easier to weigh on your currency when it’s down and the euro is already nearly 200 pips from the highs. In addition, he got unexpected backing to more stimulus from his arch-rival Jens Weidmann at the Bundesbank. A German central banker backing monetary stimulus is not something you see every day. Perhaps the situation of German and Italian banks did hit a nerve also in Berlin.
The only thing that could ruin the party seems to be the Fed’s meeting minutes on Wednesday: they could be more hawkish than the still worried environment and markets want more stimulus, not less.
More: Traders, Beware Of A Near-Term Reversal In The US Dollar – CIBC
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