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ECB’s smaller than expected stimulus measures cause stocks to tumble, euro to surge

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 4, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    FXStreet (Mumbai) - In the past one week leading to the European Central Bank’s meeting yesterday the markets had waiting in anticipation, speculating on the easing tools that the central bank would adopt to inject more capital into the system. The core inflation figures have remained dismal in the zone and the ECB was urgently required to step up measures to fight the deflationary pressures plaguing the bloc. The markets had expected 10 to 15 basis points cut in deposit rate and estimated the ECB to add another 300 billion in bond buying under ECB’s QE expansion programme. ECB chief Mario Draghi had sounded extremely dovish before the meeting and had hinted at aggressive easing to stimulate the sluggish euro zone economy.

    Stimulus measures not enough

    The ECB did cut deposit rate by 10 basis points to -0.3 per cent higher than the previous -0.2 per cent thus moving the rates further into the negative territory. By slashing rates further the ECB aimed at to weakening the euro exchange rate to support exports. The central bank however left both the refi as well as the marginal lending facility rate unchanged. Also, the interest rate on the main refinancing operations and the interest rate on the marginal lending facility were kept unchanged at 0.05% and 0.30% respectively. The asset purchasing programme was extended to March 2017. It was also decided that the bank will include euro-denominated regional and local debt in its QE programme and also reinvest principal payments in the scheme.

    The measures however fell far short of what investors had expected. Analysts believe Draghi’s easing measures probably suffered a setback from skeptics. ECB Board member Jens Weidmann said that he believed the outlook for the economy is not bad. He feels that the policy measures already in place will need time to show result. The ECB staff’s projection of a moderate growth of the economy likely convinced Draghi to wait to see if the low inflation rate does not pick up in 2016. As for now he considers the deposit rate cut to be "adequate." He noted that the decision was not unanimous; the move however found support among a large majority.

    Draghi did not rule out use of other easing instruments if required in future

    Currently inflation in the bloc stands at only 0.1 per cent and has remained at this level for almost a year now. Draghi said there are risks that inflation might remain lower than expected. The ECB trimmed its forecasts for inflation next year, to 1 per cent from 1.1 per cent previously, and for 2017 to 1.6 per cent from 1.7 per cent.

    Weak inflation makes it harder for the indebted members of the bloc, such as Greece, to reduce their burdens. They thus fail to bring their business costs down to the level of the other euro zone trade partners.

    The ECB’s target is to raise annual inflation toward its goal of just under 2 per cent to maintain price stability. GDP is expected to grow 1.5 per cent in 2015, 1.6 per cent and 1.7 per cent in 2017. Draghi did not rule out the use of other easing instruments if required.

    Investors’ disappointment reflects in market movements

    European Central Bank disappointed investors by releasing a smaller-than-expected package of additional stimulus measures. This resulted in huge swings in financial markets. Stocks tumbled. True Draghi extended the QE programme but he failed to deliver on the promise of increasing the size. He did not clarify how much would be added to overall purchases which is currently touching 60 billion euros a month. Also, several markets had actually expected a bigger deposit rate cut to minus 0.4 per cent. Reiterating markets were expecting much more James Hughes, chief market analyst at GKFX said "This has been a huge failure from the ECB."

    The dissatisfaction was apparent in the currency market. Euro witnesses a very volatile day. The euro surged, trading at a one month high against the dollar. Before the meeting it was trading at $1.05 and some analysts were predicting it was headed toward $1.00 in the coming weeks. It began its sharp upward movement post the meeting. After the announcement it started trading 3 per cent higher at $1.09. Currency strategists from Scotiabank observed the euro-dollar pair registered their largest one-day move in either direction since 2009.

    Stock market moves were equally sharp. Both Germany's DAX and the CAC-40 in France ended a 3.6 per cent lower on the wake of the announcement. As traders continued to express disappointment the wave of selling swept markets everywhere. London also fell sharply with the FTSE 100 shedding 145 points, or over 2%.

    ECB’s move yesterday has now put trader on a cautious footing ahead f the Fed’s December 15-16 meeting where it is expected to raise rates for the first time since 2006.
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