Intraday Market Thoughts

Draghi Puts ABS Buys in Play, Junk Bonds Cracking?

by Adam Button
Aug 7, 2014 23:34

It didn't have the largest impact at first but the most revealing statement from the Draghi's press conference was that the ECB intends to implement the ABS program. The yen was the top performer as problems in the junk bond market mount; the Aussie was the laggard after the employment report. The BOJ decision is due later.  

Expectations were low for the ECB press conference but we learned a few things. The euro initially rallied when Draghi left the inflation outlook unchanged but it later fell for a few reasons. The first was Draghi saying preparations for ABS purchases have been accelerated, the second was a reiteration that the ECB will stay dovish much longer than other major central banks and the third was Draghi saying they're working on the preparations for ABS purchases in the expectations that the ECB will go ahead with them.

Draghi qualified the third factor by saying that no final decision has been taken but to us that rhetoric raises the likelihood of ABS buying to about 80% from about 50%. The turmoil in broad markets and a break from euro selling after the recent decline probably prevented further EUR/USD declines in the near term but won't protect the euro in the months ahead.

What could really send the ECB into panic mode is trouble in broad markets. European stocks have fallen about 10% from the recent highs and German bund yields are down to 1.06%.

In the US, the S&P 500 closed at the lowest since May and 10-year yields finished at the lowest since June 2013. The regular reasons trotted out for the turmoil are geopolitical worries and fear of Fed tightening. But what if it's something else.

Late in the day, fund flow data company Lipper revealed that a record $7.1 billion outflow hit US high-yield bond funds last week. That market is often highlighted as a potential source of strain in markets and a round of fear there could lead to a more-lasting flight to safety 

The yen benefitted from worries in US trading but USD/JPY could not break 102.00. That level will be a key focus as the BOJ gets set to reveal its latest decision. There is no set time but around 0300 GMT is likely. Expect some yen buying if officials don't take some small step toward further measures.

Both of our Premium EURJPY Premium trades are netting a total of 300 pips, one of which is 20 pips away from its final target.
Act Exp Prev GMT
Employment Change s.a. (JUL)
-300 12,000 14,900 Aug 07 1:30
Fulltime employment (JUL)
14,500 -3,800 Aug 07 1:30
Unemployment Rate s.a. (JUL)
6.4% 6.0% 6.0% Aug 07 1:30
Part-time employment (JUL)
-14,800 19,700 Aug 07 1:30

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