ECB and the Euro

Draghi and the ECB crew are sending out smoke signals on the strengthening euro.  They don't like it.  These trial balloons, through their favored news outlet, Reuters, tries to keep the euro strength in check while they try to buy time for upcoming ECB meetings.  Remember, Draghi promised plans on QE tapering in the autumn.  Which means he has to say something on the topic either in the September or October ECB meeting.  The news on worries about a stronger euro means they are likely to punt tapering into the October meeting, backing themselves into a corner, making a decision over the next 12 months based on how the euro and financial markets trade during autumn.

It just reinforces my view that the central banks are turning into micro managers who react to short term market movements to make long term monetary policy decisions.  Of course, it is not a two sided coin.  If the economy is strong, then the central banks are slow to remove stimulus.  However, if the economy is weak, then the central banks are in a mad rush to provide immediate stimulus and jawbone the markets higher with phrases like "whatever it takes", etc.

This is why the bond market refused to selloff this year even as the S&P kept making new highs.  It sees an ECB reluctant to remove monetary stimulus, and a Fed that is increasingly worried about inflation being too low.  The Fed should be much tighter with the current loose financial conditions and rising stock market but it picks and chooses weak data to support their dovish bias.  This feedback loop keeps stocks rising and the bubble going, until fundamentals get so bad that the stock market can no longer ignore it and it comes down under its own weight, like 2015.

I see another 2015 scenario coming up in the next 6 months, and its going to be an uglier version this time, just because of the extra excesses and overvaluation.  But we've still got higher to go before that happens, so there is no rush to put on a long term short.  Shorter term, it looks like this market will retest the SPX 2470s narrow trading range that we established in August.  I expect the market to go back down to the solar eclipse lows of 2417 sometime in September ahead of the debt ceiling debate.  So there may be a short opportunity coming up soon, in the 2470s.