Why The Rally Just Fizzled: Draghi's "Puff" Was Not Enough

Confused why the blistering rally off the open following Draghi’s uber-dovish commentary has faded? The following note from BMO’s Mark Steele may explain it.

Not Enough Puff

This morning, Draghi adjusts QE to continue to puff up the ECB balance sheet. That’s helpful for global risk markets, but it’s not enough. Globally, the net figure shows central banks are blowing out their reserves;

That puff peaked last August – Figure 1 top.
Pricing on investment grade corporate credit debt peaked and started to turn lower that same month – Figure 1 middle, and Figure 2.
Then finally equities took the blow – Figure 1 bottom.

When mama’s credit market ain’t happy, eventually ain’t nobody happy;

That global corporate bond index in Figure 1 is trending lower at an annual rate of 6%/year – Figure 2.
Commodities, which didn’t really make it onto central bank balance sheets, have been in a bear market since 2011. They are falling at an annualized rate of 17%/year, and that’s ex everyone’s (yes ours too) focus on crude oil – Figure 3.

So, unless we see a turn in the synchronized bear trends in credit and commodities (and we are always looking), we’ll continue to frame many of our buy ideas in the relative and short-sale ideas in the absolute.

Click on picture to enlarge