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AM Bulletin: Equities and oil slip in early trade
31 Mar 2016
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14 Mar 2016
AM Bulletin: Confusion reins
11 Mar 2016
PM Bulletin: EURUSD revisited
11 Mar 2016
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10 Mar 2016
PM Bulletin: Mr Draghi fires his bazooka
10 Mar 2016
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 Thursday 10 March 2016

PM Bulletin: Mr Draghi fires his bazooka

 

 

The European Central Bank (ECB) took markets by surprise – again, but this time by “over-delivering.” The ECB cut its headline Minimum Bid Rate to zero after nearly a year and a half at 0.05%. But it didn’t stop there. It also cut its deposit rate by 0.1% and will now charge financial institutions 0.4% on surplus funds – another incentive to lend money out into the wider economy. In addition, bond purchases are being ramped up by €20 billion per month to €80 billion (the upper end of expectations). The ECB will also include investment grade euro-denominated bonds issued by non-bank corporations as assets that are eligible for regular purchase. Previously QE was limited to regional debt. There will also be four new rounds of Targeted Long Term Refinancing Operations (TLTROs). 

This mounted up to a whopping package of monetary stimulus, so hat’s off to Mr Draghi, who, it’s safe to assume, must have fought hard to get this past the German-led hawks on the Governing Council. 

The initial market reaction was swift and violent. The euro slammed lower as did gold and silver while European equities and US stock index futures soared higher. In other words investors reacted in just the way Mr Draghi would have wanted if he was at all bothered by anything quite as base and sordid as financial markets. 

But then it all seemed to go horribly wrong. The euro suddenly rallied as did precious metals. Meanwhile equities pulled back from their best levels. It was all rather reminiscent of the market reaction to the Bank of Japan’s shock decision at the end of January to take rates negative. Rather than sending the yen lower and thereby helping to boost inflation, the Japanese currency soared. Could history be repeating itself? 

This unprecedented splurge of stimulus should have fired up risk appetite and pinned down the euro. It was designed to send a message to the markets – the ECB was prepared to do “whatever it takes.” But it looks as if investors have their own interpretation of the message – having fired the bazooka there’s no more ammunition. During his press conference Mario Draghi insisted that this wasn’t the case. However, he rather spoilt the effect by saying that while rates will stay very low for prolonged period, the ECB did not anticipate cutting them further. Although, he went on to say, things could change. Overall result: complete confusion. 

It does look as if Italian banks which are stuffed to the gills with non-performing loans are off the hook – for now. But the real takeaway is that monetary stimulus from central banks is delivering diminishing returns. What the euro zone needs is structural reform and fiscal stimulus, but there’s really no chance of either until monetary policy is seen to be exhausted. Every central bank meeting brings us closer to this event horizon. 

  
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Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

 

Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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