China And The UK Surprise In Opposite Directions

Germany, as it is well appreciated, runs a budget surplus. Many critics, largely outside of Germany, do not approve, and especially with negative interest rates. However, German ordoliberalism rejects demand management through fiscal policy, and the problem with debt is not tied to the cost. Merkel has signaled, though, a willingness to open the purse strings. Specifically, she is endorsing a 40 bln euro plan to help regions, utilities, and workers transition away from coal. German missed the 2020 targets of the Paris Agreement, and this seems to be a classic Merkel move. She steals some of the thunder from the Greens, who the CDU might have to be in a national alliance with under certain conditions in the coming years (and has been tried in a few state governments). The risk is she exposes her right-flank. The AfD has made inroads in the east, which is more dependent on coal. This is also an issue for central and eastern Europe. It ought not to surprise if Merkel found an issue that allows her to tack to the right and protect the CDU/CSU's flank.  

The euro peaked in front of $1.1175 yesterday, reversed lower. Follow-through selling today has pushed it a little below $1.1115 in the European morning. Chunk option expirations today by impact activity. There are 2.7 bln euros of options struck in the $1.1120-$1.1125 area and another set for 1.6 bln euros at 1.1100. Above the market are options for 2.1 bln euro at $1.1150. The euro finished last week near $1.1120. Sterling was bid to a new high for the week (almost $1.3120) before the retail sales disappointment saw it reverse course. A break and close below yesterday's low (~$1.3025) would weaken the technical tone. Sterling closed near $1.3065 last week.     

America

Some observers still insist that the Fed's T-bill purchases and repo operations are equivalent to quantitative easing (QE) though the officials deny this vehemently. Sometimes the rally in US stocks to new record highs is cited as evidence, even though stocks rallied strongly before the Fed announced the T-bill purchases and sustained repo operations. From December 2018, low through August 2019, the S&P 500 gained almost 30% and has risen another roughly 11.5% since the end of September 2019. The Fed indicated it will reduce the amount offered in the term repos starting next month to $30 bln from $35 bln. Did it just tighten a bit? Probably after the mid-April tax date, the Fed will likely reduce its new T-bill purchases ($60 bln a month through it says some time in Q2) and maintain rolling over maturing issues to maintain the size of its balance sheet. It is not just a case of should it be seen as a tightening or tapering, but will it, in fact, be seen as such by the investment community? Net-net Fed expectations are mostly unchanged since the middle of June. On June 14, the implied yield of the December 2020 fed funds futures contract closed at 1.39%. It is now 1.36%.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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