The CFTC Positioning Report: Net longs in EUR receded to multi-week lows in the third week of August, as European equity markets were rocked by the announcement from the European Central Bank (ECB) of its plan to begin quantitative easing. The move sent shockwaves throughout global financial markets, and the news was met with a sharp rise in yields across European bond markets. This marked a dramatic turnabout for European financial markets, with yields beginning to rise again after they began tumbling at the onset of the monetary stimulus program.
In response to the surge in European bond market yields, the CFTC placed a hold on its two most recent European policy decisions, making it clear that it expects a similar rise in European bond yields and a corresponding rebound in bond prices to materialize. Although the CFTC did not explicitly predict an imminent rebound in European bond prices, this outlook has been widely recognized in the market, and it is likely that European bonds will continue to experience significant yield hikes once they are able to recover their losses.
However, in an effort to prevent the possible domino effect that a renewed rally could have on the U.S. economy, the CFTC did issue a “buy” signal on three of its four European reports. In addition to its purchase of the net longs report, the CFTC signaled that it would be withholding a buy signal on its Eurostat economic report, which is due later this week. This move by the CFTC does not indicate that it is expecting another sharp rise in European bond yields, but it is expected that European bond prices will rise slightly following this positive news.
The European Commission’s Economic and Financial Affairs Commissioner, Pierre Moscovici, released a statement highlighting the importance of the European Commission’s decisions to the European Union as a whole, and also to its individual member states. In his statement, Mr. Moscovici noted that the European Commission had provided important clarifications about its policies to the European Union and that these clarifications were expected to provide a clear path forward in the coming months. According to the Commission, its first step towards creating a clearer framework of policy is the publication of the draft Financial Stability Report, which is due in November. The second step towards a more unified approach towards the regulation of financial markets is the preparation of the draft Banking and Capital Markets Union Guidelines, which is scheduled to be released by the end of the month.
In addition to its concerns about the potential impact of the European Central Bank’s plan to increase European bond yields, the CFTC issued a similar report about the risks posed by the European Commission’s planned new regulation on clearinghouses. This proposed regulation would require all clearinghouses to register with the Commission as a Specialised Exchange Surveillance and Index Management Company (SEC).
In an attempt to encourage market participants to participate in the upcoming discussions surrounding the Commission’s proposed guidelines, the CFTC issued a “buy” signal on its net longs report and on its Eurostat Economic Report. The Commission’s plans to implement its new policies on clearinghouse transparency and improved market access may prompt some market participants to sell or pull out of EUR/USD trading activities at some point during the reporting period, and the timing of these transactions is not currently known.