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Higher Volatility Ahead

ECB President Draghi Warns on the Potential for a Sharp Uptick in Volatility

ecb-volatility

Market volatility is likely to increase as the role of Central Banks in financial markets increases with quantitative easing and other asset purchase programs. Low volume summer trading months are just around the corner with liquidity expected to evaporate as Central Banks command greater shares of global bond markets, intensifying the risk of wild swings in asset prices.

Draghi Warns on Market Volatility

The European Central Bank chose to maintain the benchmark interest rate at 0.05% in yesterday’s decision as traders focused on the commentary from Mario Draghi’s subsequent press conference. Aside from mentioning that the Central Bank has no official strategy for exiting quantitative easing, his warnings were heard loud and clear across markets. In his remarks, he noted that “markets must get used to periods of higher volatility.” The immediate reaction was as selloff in bonds across Europe as American bonds also fell while the Euro squeezed higher. The ECB’s growth expectations for 2015 remained intact at 2015 despite the OECD cutting global growth prospects yesterday. News from Brussels was sparse as Greek Prime Minister Tsipras meets with regional leaders to find a compromise. No deal has been announced yet as commentary remains cordial ahead of the looming deadline. The Euro has retreated modestly from yesterday’s exuberance, pulling back from recent gains.

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Oil Dumps on Rising Production

The summer driving season is officially underway in the United States as refineries increase productivity levels and crude oil storage levels continue to experience drawdowns. Data released yesterday from the Department of Energy showed that inventories fell by 1.948 million barrels last week and while this typically would be viewed as a positive for oil prices, the production figures sent prices tumbling. According to the latest figures, crude oil production has hit a new multi-decade high, with production currently at 9.568 million barrels of output per day. Inventory levels are still dramatically higher versus one year ago, meaning that the overhang in oil markets continues to grow as Iraqi production ramps higher and the possibility of Iranian crude hitting the markets at the end of the month would add increased pressure. WTI crude oil is presently trading back below $60 per barrel with Brent under $64.

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ADP Nonfarm Employment Beats Expectations

After recording a particularly weak print in the previous month, ADP nonfarm payrolls managed to rebound back above 200,000 in May, printing at 201,000. Most of the jobs added came from the services sector as manufacturing continues to experience losses. Construction employment rose substantially and while over 12,000 jobs were added in financial activities, banks look poised to announce layoffs after the recent announcement from HSBC about cutting the global workforce. Aside from employment numbers which will likely foreshadow a stronger nonfarm payroll number tomorrow, the US trade deficit managed to improve solidly in April on renewed growth in exports as imports fell by approximately 3.30%. After reaching a 6-year high of $51.4 billion in March, the trade deficit April managed to shrink by nearly 20% versus the prior month. The dollar rebounded modestly on the data before a squeeze higher in the Euro saw momentum against peers reverse.

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EURJPY Equidistant Channel Technical Pattern

The Euro continues to gain momentum as short-interest in the Euro declines with traders seeking to flatten positions ahead of tomorrow’s Greek IMF repayment. The squeeze higher in Euro peers comes after a night of discussion in Brussels ended with no agreement on reforms or decisions to release aid payments. The EURJPY pair continues to trend higher on optimism that a deal could be reached ahead of the deadline with the pair trading within an equidistant channel pattern. The pattern has a bullish bias with ideal positions taken near the lower channel line to target the upper channel line. Any pessimistic outcome from Greece could see the pair below the lower channel line, indicating a possible breakout trade to the downside as optimism in the Euro wanes.

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