“…And for my next trick, I shall….erm….I don’t know.”
It looks as though the ECB really has had the 3D printers working overtime making kitchen sinks because it looked as though all its remaining stock was thrown at the market yesterday.
Market reaction to the announcement was initially one of elation after it, as expected, cut the deposit rate to -0.40% from -0.30% but also set the main refinancing rate at zero, down from 0.05%, and cut the marginal lending facility to 0.25% (0.30%), as well as increasing the QE programme to €80bn in monthly bond purchases. Everything went bananas with offers in stocks and bonds being lifted blindly while the euro was dragged off to the woodshed for a beating.
And then it all went horribly wrong as the question emerged about what weaponry the ECB had left. Not only that but what will something as piddly as 0.05% off the refi rate really do to change the economic dynamics in the Eurozone? Is this not another classic case of arranging the deckchairs on the Titanic?
So having dumped the euro down from its opening level of just under US$1.1000 to a low of US$1.0822 immediately after the policy announcement at 13:45 Frankfurt time, and having listened to what St Mario had to say in the press conference, it all went into reverse and over the next two hours the euro rallied sharply to close just north of US$1.1200. Using the Dax as a pars pro toto, it had rallied ahead of the announcement and through the morning from its own open in the low 9,700s to around 9,830. First response was to shoot up to within a whisker of 10,000 and then, after a reality check, it dumped 497points to close at 9.498.15.
There seemed to be a very clear feeling that the ECB has shot its last bolt and that all it has left in terms of a big bazooka is the box it came in.
Like all these things, the fear and loathing which was clearly afoot yesterday afternoon will eventually wear off and markets, congenitally optimistic, will find something good to think of. Growth figures might be feeble and unemployment might be falling only very gradually but all indicators are pointing in the right direction. In time the continent’s economy or, if you prefer economies, will recover, ECB stimulus or no ECB stimulus.
Bonds, corporate bonds
I thank all those who called in and congratulated us for having called the inclusion of corporate bonds in the buying programme although it still seems a bit unclear what exactly will and will not be on the shopping list. I can’t imagine that OTE will be first choice. Spreads did of course react positively, which is fine for those who own the stuff, but apart that does nothing other than to take away one of the few low-risk asset groups from which humble savers could still generate a spot of income.
Fiscal austerity is universally unpopular and it has possibly been driven as far as it can be. Monetary stimulus also seems now to be pretty much at the end of the road. That might spell the nadir of top-down recovery planning and perhaps the next move will have to be for people to work harder for longer and for them to lower their expectations. US recoveries have always begun with guys with a good idea in their garages. Europe has never been that adept at letting start-ups start up and structural flexibility, from health and safety through fiscal tolerance – stop trying to ban the €500 note! - is needed in order to let people get on with it. The all-controlling Orwellian super-state is failing and the election victories of parties on the fringes of both political wings attests to this. Could it not be that the deeper down government gets in controlling the economy, the less well it works? That might be a subject for another day.
If he had stuck to the rules, Columbus would never have tripped over America. If Alexander Fleming’s laboratory had been spotless, we wouldn’t have antibiotics and if Dick Fosbury hadn’t leapt over the high jump backwards in 1968, they’d still be doing the scissors. How about they just let us get on with it? Total control has failed or is, at least, at risk of failing. Let’s let economic cycles take their natural course again and let’s return power to the people. OK, rant over.
After a miserably volatile session in Europe and a highly indifferent one in the US, Asia is looking a lot perkier today and I’d expect European risk markets to bounce back.
Cyprus’ hill
Meanwhile, thanks to my little spy in Cyprus who points to the Eurogroup statement issued as the country was released from under the bail-out umbrella. I quote: “The Eurogroup supports the Cypriot government’s decision to exit its macroeconomic adjustment programme without a successor arrangement. The Eurogroup commends the Cypriot authorities for the overall successful implementation of the programme and the important achievements made in the past three years, and also thanks the institutions for their vital contribution towards this end.”
It ends “….the Eurogroup welcomes the reaffirmed commitment by the Cypriot authorities to sustain public finances consolidation and the reform momentum over the medium term, in order to address the remaining vulnerabilities. The Eurogroup will continue supporting the reform process in Cyprus, inter alia in the context of post-programme surveillance and of the regular EU and euro-area specific monitoring frameworks.”
My spy adds an article from the Cyprus Mail from January which reports non-performing loans to still be at 46.1%, or €27.4bn. Just for the record, total GDP for 2014 was, according to the World Bank, US$23.226bn or €20.73bn. That has non-performing loans on the banks’ balance sheets at 120% of GDP.
Writing in its exit statement: “The Eurogroup welcomes the fact that economic activity has continued on a positive trend, and the banking system has further healed.” Happy days and keep on smoking whatever you are smoking…..
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. It’s only just about warm enough to go out into the garden to recover the Christmas tree which has been lying by the back gate waiting to be chopped up and, bang, it’s already nearly Easter again. The good news is that for those who are going skiing with the kiddies, conditions should be perfect but those planning to go camping, better have a rethink. Apart from that, Wales at Twickenham. I know who I’m backing….. regards.