One of my go-to descriptions of my job in financial markets borrows from former Secretary of State James Baker. He said that one of his favorite aspects of his job was that the world was always a different place every day when he went to work.
That principle was demonstrated this week, which started with markets in quintessential summer doldrums. There was little movement of any consequence across almost all asset classes.
But all that changed on Tuesday, when European Central Bank President Mario Draghi was speaking at an ECB conference in Portugal.
In what he thought was a highly nuanced statement about policy adjustments in relation to changing inflation dynamics, Draghi set off a chain reaction of euro-buying that juiced the currency to a 52-week high against the U.S. dollar.
The ECB clarified a day later and the euro backed off – but it brought plenty of consternation to the markets. It also sparked healthy debate on our trading desk about who was at fault: Was it Draghi's choice of words or the market's reaction to them?
Our head trader, Alan Rose, who writes our daily commentaries, lays the blame squarely at Draghi's feet - while I am more apt to fault markets' tendency to parse words indiscriminately.
No sooner had we cleaned up the mess from the first debate than Bank of England Governor Mark Carney found himself in the same pickle. At that same conference in Portugal, Carney noted that he was prepared to raise interest rates if UK business activity improved. That was just a week after he had said “now is not the time" to raise rates.
Carney's statement was nuanced, yet it still led to the British pound surging more than 1 percent and UK interest rates moving sharply higher.
Truth be told, even as we debated this on the desk, it is clear that a lot of different forces are at work here.
These two central banks have been in accommodative mode for the better part of a decade. So anticipating a turning point in policy has become a big deal. And with so little else going on, maybe markets just needed a small boost to come to life.
My View:The best thing about markets is that they are made up of humans. The same fact can be said to be their worst trait. At least this ensures that they will never be boring for long.
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