The Rearview Mirror: November 2017


Tonight I’m going to have myself a real good time
I feel alive
And the world I’ll turn it inside out, yeah
And floating around in ecstasy
So don’t stop me now

It’s a part of the song produced by Roy Thomas Baker & Queen “Don’t stop me now”. Symmetrically, the chorus couldn’t express better its sympathy for the stock market lauding itself reaching new highs.

It shall not be Draghi’s turn to stop such a good time, by suddenly advocating for the end of a quantitative easing. De facto last Thursday, the ECB decided the fate of its quantitative easing program by halving the size of the monthly purchases to Euro 30bn and by opting for an extension of the quantitative easing program at least until September 2018. Furthermore, not to be forgotten is the current balance sheet which amounts for Euro 4.2tn making the reinvestments coming from the maturing debt which is not negligible. An average of Euro 10bn per month can be considered a reliable estimate of this collateral QE effect, with German counterparts to benefit most with Euro 30bn across the entire 2018.

Together with Mr Draghi dovish stance, this will help to mitigate the tapering throughout its course. Or a better way to put it, it will support the prolonging massive quantitative easing since even Mr Draghi never mentioned the word “tapering”. There is no doubt that the markets will keep receiving a positive contribution from the ECB.

Mario Draghi.  President of the European Central Bank (ECB)
Mario Draghi. President of the European Central Bank (ECB)

Forward looking, also the higher odds to see Jerome Powell as the next chairman of the FED, supported both the stock and bond market. Admittedly, Powell is most likely to follow Chair Janet Yellen accommodative policies and its more probable nomination is dissipating doubts about the other two candidates John Taylor and Kevin Warsh, as they are considered to be more hawkish. Finally company results’ also fairly supported the equity price action. From a micro point of view, it seems, there are no particular news able to stop the run of markets.

Here again is Freddy Mercury’s song:

I’m a shooting star leaping through the sky
Like a tiger defying the laws of gravity”

“I’m burning through the sky yeah
Two hundred degrees”

“Don’t stop me now I’m having such a good time
I’m having a ball
Don’t stop me now
If you want to have a good time just give me a call

The chorus of a song is meant to be the most memorable part. Should we find some advices from its lyrics, to enjoy the party at this stage one could consider to buy a call; it is not necessarily cheap but it is a way to participate to one that could prove to be the last leg of this long bull market. In another way, pay attention to the gravity force. It’s always a question of flows. We can certainly have satisfaction of leaning on flow support coming from accommodative central banks and from passive strategies that are powering ETF longs. A generalized taking profit, at the moment, seems to be the only catalyst that can affect the market. Not even a political crisis as the one that is concerning Spain Government and its Catalonian independent force to impact this complacency trade. Still it is treated as a regional problem, causing the widening of credit spread and weighting on IBEX companies. A risk of contagion for Italy is not priced in yet if we have a look at BTP spreads.Catalogna

In other circumstances the negative news, even if marginal, derailed the positive momentum. With strong evidence, we are not here, perhaps we are “floating around in ecstasy”, “so don’t stop me now”.

 Christian Zorico: LinkedIn Profile

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