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ECB Rate Cut Odds Jump After “Dismal” PMIs

Courtesy of ZeroHedge. View original post here.

Stock bulls got some unexpected "good" news this morning following the latest dismal manufacturing survey data out of the Eurozone. As we noted earlier, Eurozone manufacturing PMI was the worst in six years, with the German Mfg component printing the worst number in seven years, caused by "an accelerated drop in export orders—the most marked in over a decade” per Markit, while French data saw both Services and Manu numbers miss consensus as well.

Why is this good news for stocks? Because as Nomura's Charlie McElligott writes this morning, the case for imminent ECB “easing” – which may be announced as soon as tomorrow – grows, with a 10bps cut probability rising as much as 51% for tomorrow according to EONIAs…

… with two full cuts priced-in, and causing a “volatility pause” in Bund futures trading, with lower Bund yields tumbling back to just shy of all time lows at -0.39%…

… and feeding into an initial EURUSD dip to 1.1127, just shy of two year lows.

Meanwhile, stocks were happy with the DAX rising to session highs, and just shy of 1 year highs, on this escalating likelihood of an imminent ECB policy rate cut/enhanced easing package, according to McElligott (for a full "menu" of what the ECB may announce tomorrow, see this post).

Putting the latest data, and market reaction in context, the Nomura strategist repeats that his best-case “Dovish Surprise” scenario for global risk-assets at tomorrow’s ECB meeting would be a

  1. 10bps cut with
  2. announced tiering of deposits (+++ EU Banks), something which is critical as otherwise EU banks face dramatic losses as explained last night
  3. enhanced fwd guidance,
  4. resumption of QE in Sep

Yet while McElligott concedes that "that is a lot to deliver on short notice" at this point the manufacturing slowdown in the Eurozone  – especially in Germany and France – and speculation of an imminent recession so real now "that it risks dragging Services with it, which could trigger an actual recession." As such, the Nomura strategist is confident that the market will "see through" any ECB disappointment tomorrow as purely “delaying the inevitable” and continue pricing-in an aggressive easing package.

Of course, this being McElligott, he quickly looks at the quant factor that are behind the latest move in European stocks and finds that EuroStoxx dynamics “under the hood” once again highlight the Growth Scare/Duration Bid story, "with “Cyclicals” as the three worst performing sectors (Energy, Financials, Materials) while the best performing sectors on the session are the Duration-sensitive “Slow-flation Risk Barbell Longs” of 1) Defensives / Min Vol / Bond Proxies (Utilities, REITS) and 2) Secular Growers (Technology, Comm Services and Cons Disc)." Which is to be expected considering the resumption of the plunge in yields.

However, as Nomura observes, there is one potential offset to the aforementioned dynamic in US equities today that could “soften the blow” for “Value” factor market-neutral: namely the pressure exerted on tech/growth stock, i.e., the prominent “Growth Longs” (also known as “Value Shorts,” because they’re expensive) which are likely to be under with regard to this US DoJ antitrust probe into the Tech giants, although it now appears that the early weakness in the Nasdaq has fizzled and instead the market is more focused on Boeing and CAT which have dragged the Dow lower.

One final point from McElligott: "Gold continues to hold very firm in light of the evidence pointing to likely escalation of “beggar thy neighbor” global FX depreciation wars, $1426.50 last—as we continue seeing macro fund interest in upside expressions across GDX/GLD."


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