As the world watched with bated breath for any dovish tilt from Draghi this morning, RBC’s head of cross-asset strategy Charlie McElligott laid out his game-plan. While the EUR is higher (hawkish), bund yields are lower (dovish) McElligott warns the cozy calm ‘status quo’ could get a rude interruption in the fall…
Having not quite got the reaction he wanted, leaks were implemented to force the dovish tilt…
So as McElligott wrote earlier:
One scenario I can envision playing out in the coming months: dovish read today feeds further into lazy carry/status quo (long growth stocks and CCC bonds, short vol) behavior for another five weeks before reintroduction of interest rate vol in late Aug (Draghi Jackson Hole) and Sep (Fed balance sheet normalization), all against an ongoing commodities rally which will pressure nominal rates and inflation expectations higher.
This could in fact set table for a mini ‘taper tantrum’ into late Summer / early Fall liquidity doldrums, as ‘tightening into slowing’ fears resume against a spike in interest rate volatility.This could also help fuel further equity factor rotation into underweighted ‘value’ from hyper-crowded ‘growth’ as nominal rates jump higher, or even outright ‘risk off’ on the reintroduction of rate vol.
WHAT A CONSENSUS ‘MORE DOVISH THAN NOT’ MESSAGE MEANS FOR THE DIRECTION OF MARKETS: IF the market hears the ECB and “wills it to be dovish” (as it currently ‘feels’ to me like folks are leaning), then risk-assets (equities and credit, status quo, led by growth stocks and CCC bonds) will be expected to trade higher / rates expected to trade directionally lower as the sense that the eventual ‘taper tantrum’ has again been avoided for at least another month, until the aforementioned Draghi / Jackson Hole event, followed shortly thereafter by the Fed’s likely commencement of balance sheet normalization in September.
