Super Mario Delivers
March 11, 2016
We were expecting markets to fly OR cry on the back of Mario Draghi's announcement yesterday, we weren't expecting both.
The announcement was a bazooka by market expectations. An extra €20bn of monthly asset purchases, funds that are now permitted to be used to purchase high grade corporate debt and not just sovereign paper. In addition the deposit rate was cut a further 10 basis points to -0.4% and the marginal lending facility rate cut to 0.25%. On top of this banks got another Targeted Long Term Refinancing Operation (which is a borrowing subsidy for banks) Basically a monetary free for all, unless of course you want to park money at the ECB rather than get it out into the economy.
The initial reaction was to sell off the euro significantly and at the same time stock markets rallied heavily, France's CAC index up 3% at its peak. Then Super Mario dropped a banana skin for the markets to slip on. He said “we don't anticipate the need to reduce rates further” h effectively drawing a line under this stimulus plan. Investors immediately bought back heavily into the Euro and sold-off stocks like they were going out of fashion. Markets went from +3% to -2% in the space of a couple of hours and substantial confusion remains on how to trade this.
It's going to take some time for the dust to settle on today and by next week investors will probably have realised that the lack of carry in the euro means its a poor currency to hold and that the amount of cash in the European system means stocks are a sensible trade, but until then we expect volatility and uncertainty to remain.
Draghi's words were, in our mind, a master stroke. He wasn't just telling the market that there's no more to come, he was telling European policy makers, in a very public fashion, that the ECB has thrown the kitchen sink at the problem, bought some breathing room and that it's now down to policymakers to do their part if they want to see the recovery sustain itself.
The strength in the euro led the charge for overall weakening of the Dollar against a number of its peers, which in turn meant that oil prices got a boost in the afternoon session, holding above the $40 per barrel level. This news will be welcomed by oil markets who were hoping that there would be some collusion between governments to cap oil supplies – sadly for them this now looks unlikely.
The Church of England has weighed in on the Brexit debate, challenging the No camp to outline the consequences if the UK were to go. The FT has more. On top of this, David Cameron has been accused of roping in the Bank of England, by jumping on Mark Carney's comments that the UK leaving the EU is the biggest domestic risk to financial stability. Mr Carney was commenting on financial stability and not on his opinion on whether to stay or go.
Today's data sheet will be overshadowed by investors working out how to trade Draghi's news yesterday in the medium-long term. Futures are already showing large gains in European stocks and the Euro has weakened off a little, so maybe we'll be all square by close of play, who knows!
Have a great weekend