The Rooster Call: ECB Monetary Policy Statement

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!

The fireworks start at 7:45AM ET with the ECB monetary policy statement. No matter what happens, someone will fret the action is not enough…others will fret it is out of control, while still more will say the action is too little too late. The entire trading world awaits the ECB. If we see a quick pop move in markets of substantial gains in equity index futures, we know the rest of the day could virtually flat line. Just be aware. If markets fall due to lack of appreciation for any new policy…USA traders may try to work ES higher. It’s a pins and needles moment for equity index futures and other markets as traders automatically assume a swing to “risk acceptance” will overwhelm the market causing a rise in most risk assets. Brent is back over $50 a barrel and this of course has move US crude higher. What if the ECB cannot agree on a policy? Hmmm, market not prepared for that.

Last night I advised taking profits on Australian dollar trade making $780.00 per contract. We simply do not know how markets will react to the ECB and knee-jerk is possible causing Euro to move lower whilst other currencies move higher. We are still in our March soybean trade a little worried at not one, but three “no never-mind” days (Candle stick chartists call these “dojis”).

Last night I wrote the following to nightly video clients…

Well, tomorrow (today) is a potential historical day in the trading world. Not content to let the hidden hand of economics fix the Euro zone, we have a central bank stepping up to the plate offering to throw money at the problem. Everyone knows the problem is structural, yet no one is ready for change. Count Draghi was assuming time heals all wounds, and unfortunately, time was not his friend.

In poker, players reach a point where they are asked to “put up or shut up.” The ECB is at this point. The great vacillations are expected to end. Market participants, financial news outlets, and the rumor mill have made the decision the ECB will embark on quantitative easing. Today’s Financial Times discussed 50 billion Euro might be purchased per month for two years. This is a respectable figure…all conjecture at this point in time. Of course two years is simply to act like there is an end to the program. In truth, QE will likely be open-ended as we saw in the USA.

In a world of monkey see/monkey do, traders embrace the idea is QE will cause equity indexes to flourish in a sustained move higher. The key word here is “sustained.” The pattern is set already…first by Japan and second by the USA. IF the ECB inaugurates QE, the bank enters uncharted territory gaining new powers. Once this genie is let out of the bottle, I am telling you the die is cast for long-term money printing. This is the way central banks operate. Draghi pushes for ECB credibility. Conservative nations push against QE knowing the danger of money printing with promises of pay back from Euro zone countries. France is a great model of failure to meet the original common currency deficit targets, without any repercussion. QE opens an entire new sphere of unaccountability potential.

If I were the head of a European state, I would be incredibly excited whilst drinking the finest champagne with the Finance Ministry team. We would hatch a plan to issue bonds like crazy knowing the ECB would buy the bonds. We would make public works the largest department fixing roads, bridges, updating tourist attractions, building public housing, etc. To our corporate supporters, we would offer state loans paid for by bonds we sell to the ECB. The only thing we ask or corporate supporters is to grow, merge, acquire. The ECB with QE stands as the pot of gold at the end of the rainbow…a jack pot.

We have the crude report today at 11AM ET according to Tonight we have both Japanese and Chinese first look at PMI. Both are important for traders judging the slowing world economy.

Option traders are positioned with both seasonal trades and a new trade issued yesterday on SPY just in case markets embrace the ECB action.

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