Market Grind - The ECB Blinks

Published: Sat, 03/09/19

09 March 2019

If you were paying attention to the News thursday evening, the backoff by the ECB made for some very interesting news. Into the weekend there are a slew of people who will tell you that what they did was a good thing good thing for the market. Like the central bank can have perpetual control on the economic cycle. They can buy up the asset markets directly but you do not have to go further than Japan to see that ends.

But back to thursday night. Here is a headline quoted on Twitter.

Now if that does not have your roaring in laughter what would? So is it a good thing they did not raise rates or a good thing that they did not lower it! One look at that and I know this story is toast. The ECB just admitted that the Eurozone is at the risk of recession with Italy already in one. Yes that is good news, because now days bad news is good news. Reason being that central banks resume printing. But that misses the bushes for the trees. Central bank printing ended just 2 months ago in Europe and that too after growth was slowing for 12 months already in the reported data. Printing was stimulative at the start of 2009-2014 in several rounds of QE or ''Whatever it takes'' but as the delta of credit growth to GDP growth runs out, you are going to need more delta in credit for the same growth. The amount needed has risen exponentially for the US from the 2002 recession to the 2008 great recession. So simply an announcement is not going to do it this time. Till the market sees a bigger number than the 700 billions a year committed the last time it will not be convinced that growth is returning. So far the FED has only spoken and is still in QT mode. The ECB has backed off on raising rates at all, but is providing liquidity to banks that need it selectively.

What all the above meant for the market is what should matter to you. The equation goes like this. ECB sticks to lower rates while the FED is still tightening in QT. So the dollar goes up and Euro down. That is now drawn in the sand. A rising dollar is exactly how the rest of the developed world [read Europe Japan and China] stimulated their economies after 2014. Result was a strong dollar that crashed commodities and EM markets dependant on it. The same movie just started playing again in case you did not notice. The chart below was published last week at Indiacharts days before the ECB even spoke, clearly the market saw it coming.

Gold Silver copper and crude backed off in the last two weeks and the rest of the base metals should be doing so now. This is outright deflationary. The impact is starting to be felt again in EM currencies, and the USDINR while acting god will not do so forever. In fact it is not in our interest to see a strong INR

This was stated by the government in Oct 2018, that a weak rupee to 74 maybe good. The need for inflation in a deflationary environment will get louder as we tread forward.

One of the reasons why the street will be crying will be that a large part of the recent growth story in India was predicated on the rural demand story. I am not sure how much of that comes from additional output or productivity gains. A large part depends on MSPs or simply rising prices, or inflation, and cheap credit. So much for the war on food inflation.

But it is going to get worse. I spent my time from 2015-2017 looking for a bottom in global agro commodities as I did believe that they will pick up in price after the long lull. More convinced after the dollar topped in 2017 into a bear market maybe. But every rally in global agro was short lived and by the time it was time for a 3rd wave the trend faltered. With that I bring you to the following chart of the Agro commodities index in India - the NCDEX DHAANYA index of nearly a dozen agro commodities. It gives you a broad idea of things. The idea on this chart is that for years the attempts to make a new high ended in short corrective moves and now at the end of 2018 it looks like a long term ending pattern starting 2012. An ending diagonal at E once complete would mean a much steeper decline in Indian Agro prices. That would be outright deflationary and would put the farm sector into even more distress than it already is. The chart is ominous and should be watched closely because global rice, wheat, corn, coffee and sugar prices are again falling in the last week and there is not sign of a bottom yet.

Once you understand that the center of gravity to this entire discussion is the dollar, that is the only view you need to get right. Everything else just follows.

The Truth About The Markets!

Rohit Srivastava

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Rohit Srivastava
www.indiacharts.com
For accurate market forecasting. Market forecasting is a study of past data to assess future probable outcomes. It is our endeavor to discuss high probability outcomes for traders and investors. However this is not a solicitation to buy or sell stocks futures or options or any security. Trading in any financial market should be done with sound knowledge and the help of a qualified investment adviser. Stocks based on the Elliott wave model are based on the Fibonacci fractal of the market and momentum indicators, Levels are based on Fibonacci maths and are only indicative of what the mathematical model throws up. This is not a research report. We are not investment advisors This is not a recommendation to buy/sell.
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