Market Commentary
Brian Stutland
Yesterday Mario Draghi published an op-ed in “Die Zeit” in which he discussed what is necessary to ensure the success of the Euro. He says that ”the euro area has not yet fully succeeded as a polity” and “to have a stable euro we do not need to choose between extremes,” the extremes referenced being returning to past, pre-Euro ways, or creating a “United States of Europe.” On finding the proper medium between these extremes, Draghi says:

“How far should this go? We do not need a centralization of all economic policies. Instead, we can answer this question pragmatically: by calmly asking ourselves which are the minimum requirements to complete economic and monetary union. And in doing so, we will find that all the necessary measures are firmly within our reach.”

Unfortunately Draghi stops short of actually outlining those “minimum requirements.” All we get from Draghi is what we knew: that the Euro zone needs political reform. No actual solution is presented, only encouragement that a solution can be reached. Draghi wraps up the piece by reiterating what he sees the ECB’s role in the situation to be:

“From the ECB’s perspective, a strong economic union is an essential complement to the single monetary policy. Building this will require a structured process with correct sequencing. Yet citizens can be certain that three elements will remain constant. The ECB will do what is necessary to ensure price stability. It will remain independent. And it will always act within the limits of its mandate.

Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.”

European markets did not react to the piece, with the DAX, STOXX 50 and FTSE 100 nearly unchanged. The purpose of the op-ed appears to be for Draghi to share his thinking with the German people and get everyone on the same page. This could mean that Draghi is building up to a new policy and wants to ensure the Germans understand his rationale behind it.

Trading yesterday in the US was again tight and choppy with the major indices closing virtually unchanged. The VIX was up 0.85% to 16.49. Many are taking this to mean that the market is complacent. However, the VIX futures term structure tells a different story; September VIX futures closed at 19.00, a 15% premium to the spot VIX, and October futures closed at 21.45, a 13% premium to September and 28% premium to spot. This shows that there is bid under VIX futures as traders are expecting volatility to rise into September and October expirations despite the near record low realized volatility the market is experiencing at the moment.

US Q2 real GDP was revised upward this morning to an annualized +1.7% from +1.5%, in-line with consensus estimates. The GDP price index measure of inflation was unchanged at an annualized 1.6%.