Submitted by Francseco Filia of Fasanara Capital
Measuring the Bond Bubble
A key conviction of ours is that we live through a Twin Bubble in asset markets: an Equity Bubble, particularly in the US, and a Bond Bubble, particularly in Europe.
And we're back at all time highs.
European stocks dropped, Asian and EM market rose, and S&P were lower by 0.3% as investors assessed the latest overnight carnage in the USD which plunged to the lowest level since the start of 2015, sending the USDJPY tumbling to 107, the euro extending gains to just shy of $1.21 and a slowdown in China’s export growth which however did not prevent the Yuan from posting its best weekly gain on record.
In our concluding comments on the ECB's disjointed message yesterday, in which Draghi feebly tried to talk down the EUR while talking up the European economy, and also hinting at the start of policy normalization but without actually doing so, in the process sending the EUR shooting higher, we said "And now that the market is supremely confused, we expect the ECB to lob the next Reuters trial balloon any moment to punish all those who keep buying the EUR."
Having concluded that Draghi's speech was on the margin dovish, not least of all due to Draghi's parting shot at Euro bulls, saying that "nothing will derail ECB's will to deliver inflation", a refreshed version of "Whatever it takes", the EURUSD has since slumped from session highs, and was back under 1.20, in fact filling the entire post-Draghi gap, driven in part by the release of the ECB's currency forecasts, which are far below the spot rate going all the way to 2019.
This is what the ECB now forecasts: