Markets become increasingly acclimatized to negative news - adjustments never faster

6 December, 2016

Investors are getting used to bad news, and the lessons learnt in the past couple of months were implemented on Monday after the Italian referendum results. It’s true that a “No” vote was priced in to some extent, but the heavy defeat with 60% lead for those who rejected the reform of the constitution suggests that anti-establishment populists in Italy are on the rise. Although the Five Star Movement may be pushed away until the spring of 2018, there are many uncertainties ahead especially for Italy’s financial system.

The Brexit vote took a couple of days to be shrugged off, and Trump's electoral victory shock lasted only a few hours before bulls took control of the market, so why not respond in a similar way to Italy’s referendum? The EURUSD fell more than 150 pips in the immediate aftermath of the vote result testing 1.0503, and in less than 24 hours the pair surged by 290 pips. We can have a list of reasons to justify the price action, such as buy the rumours sell the news, Italy’s referendum vote doesn’t mean Brexit, or short squeeze occurred, but the most obvious fact is that markets are acting in such a weird way, where bad news is received with open arms, and this trend may not last too long.

Reserve bank of Australia held its final meeting for the year, and as expected kept rates at a record low of 1.5% after reducing them by 50 basis points in 2016. Very little changes were seen in the statement too, indicating that the central bank is in watch and see mode, and the Australian dollar reaction was mild, moving in a 40-pip range against the U.S. dollar. Traders should keep an eye on tomorrow’s GDP release where the Australian economy is expected to contract for the first time in 5 years.

The key central bank meeting for the week is Thursday’s ECB meeting. The €80 billion asset purchase program will end in March 2017 and the key question is going to be whether the Central Bank will continue buying bonds at the same pace or reduce the amount in a similar tactic to the U.S. Fed, which started reducing its monthly purchases by $10 billion in December 2013. Italy’s no vote will undoubtedly be discussed; however, any sort of bailout will create political chaos, but it remains to be seen whether it will indirectly impact the ECB’s decision.  

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