ECB Finally Cuts the Conversation and Takes Action
Mario Draghi didn’t need to talk the Euro down yesterday, as his actions spoke volumes. A cut of all three main ECB rates coupled with a potentially large asset purchase facility were the order of the day and the single currency felt the blow.
In polls ahead of the announcement, only a couple of banks thought that we might see something more than spin from Mr Draghi. Those that backed their opinions for change would have been handsomely rewarded, as European stocks rallied heavily and the single currency broke down through a series of major support areas.
The reduction in rates takes the overnight deposit rate down to 0.25%, which is a relatively large premium for banks to pay to park funds at the ECB – which is what the ECB are now hoping they don’t do. The other major part of the plan is to purchase asset backed securities (packages of various loans against an asset, much like the ones that got the bad press in 2007/8 which were AAA rated, even when they were made up almost entirely of sub-prime mortgages!) from banks to free up cash and unburden them, in order that they lend more.
We like that the message has finally got through to the ECB. We don’t, for now, like the Asset Backed Securities route as it is fraught with regulation following the global crisis and similar instruments being the catalyst. This could mean that the headline numbers that the ECB hopes to purchase could be a long way off realisation. All the while Europe continues to slide further.
Investors in equities clearly liked what they heard though. European stocks rallied between one and two percent on the news. Using the FTSE100, which only rose 0.06%, as a benchmark, there was a huge boost in optimism in the European session.
The optimism does appear to be Europe-centric though, as Wall Street found its way to selling stocks, as did Asia. We’re less surprised by the US selling than Asia, as we see Europe’s moves as further opportunity to borrow in Euros and invest in emerging markets – the carry trade. We’re sure this will be the case, but it might be that markets are waiting for the fact to materialise, rather than betting early on the probability of it happening.
In Ukraine, there is a proposed ceasefire being backed by both Poroshenko and the rebels. the ceasefire is contingent on a meeting going ahead today in Minsk, which will be attended by Ukraine, Russia and the OSCE. Those of you that read this Bloomberg article earlier in the week might conclude that Putin’s step by step plan is in effect.
From the NATO summit. We’re expecting to hear of some Russian sanctions today and perhaps some more direct support for Ukraine. The general consensus within the summit is that Russia are openly helping the rebels and they want to try and take a stand on this – though they have agreed that this doesn’t include a military solution. We could hear more on plans to tackle the rise of ISIS too. A story in the FT says “military chiefs have yet to be given any directions on operations in the Middle East, but one senior officer said they understood a nod from Number 10 could be imminent”
If yesterday’s market frenzy wasn’t enough for you,l we’ve got US Non-Farm payrolls today. Yesterday’s jobless claims indicator rose unexpectedly, so this is likely to translate into the NFP deviating from expectations, which will result in volatility. The Dollar remains the dominant force in the FX markets, but perhaps a disappointing number might lead to an easing off the gas pedal.