Thursday, March 10, 2016

Draghi As Britney Spears: Oops I Did It Again As Markets Begin To Doubt the ECB's Competence

A twofer From Barron's. First up, Stocks to Watch Today:

Oh No He Did It Again: Stocks Slip as Draghi Turns Lemonade into Lemons
Stock futures were pointing to a higher open this morning after the European Central Bank cut interest rates, increased the amount of bonds it would buy and even said it would purchase corporate debt. Since then, however, stocks have slipped into the red as, with one phrase, ECB chief Mario Draghi managed to undo the market’s positive reaction to those steps. 
The S&P 500 has dropped 0.4% to 1,981.42 at 11:20 a.m. today, while the Dow Jones Industrial Average has fallen 0.5% to 16,909.83. The Nasdaq Composite is off 0.7% at 4,643.07. The S&P 500 had been up as much as 0.8%. The euro has gained 1.6% against the dollar. 
Strategas Research Partners’ Mary Catherine Sinclair explains how Mario Draghi disappointed the markets once again: 
The ECB announced a kitchen sink easing package this morning that exceed the market’s expectations. In addition to lowering all three of its target rates this morning it also expanded its Asset Purchase Program (APP), and announced a new series of TLTROs (see pg. two for more details.) The market’s reaction was initially positive– the Euro depreciated versus the US dollar, European bond yields declined, gold declined, the Euro Stoxx Bank Index strengthened (as did the broader Euro Stoxx Index) – but all measures reversed their trend as ECB Chairman Draghi explained the changes further. In particular, the market reacted negatively to Draghi’s mention of an inevitable floor in negative interest rates and ruling out of a tiered deposit rate system; European banks were quick to criticize the ECB’s negative interest rate policy. It’s hard to see what else the ECB could have announced, but ECB Chairman Draghi appears to have lost the market’s trust. Banks are central to the ECB’s ability to stimulate growth and it remains to be seen whether the incentive of free loans through TLTROs will be enough to cushion the blow of negative interest rates tightening financial conditions....


And from Focus on Funds:

Sic Transit Gloria: Post-ECB ‘Bazooka’ Rally Fades
Well, how do you like that? 
The European Central Bank delivered an aggressive series of interest rate cuts, some deeper into negative territory, and boosted the magnitude of its asset-purchase program. It also added new lending-friendly measures and expanded its purchase program to include corporate bonds. All of which seemed to reinforce ECB President Mario Draghi’snotion that the monetary authority will do “do whatever it takes” to snap the Continent’s economy out of its disinflationary torpor. 
Stocks surged! The euro plunged! Credit concerns at European banks eased! The Wall Street Journal, Financial Times and Reuters all used “bazooka” to desribe the mix of policy actions. 
And then, in a post-announcement question and answer session, Draghi said that he doesn’t anticipate more rate cuts. Hmm. That seemed to mix the message a bit, as well as raise fresh doubts about the wisdom of negative interest rates. 
What had been a 2.5% rally in the Stoxx Europe 600 has recently faded to a 0.4% advance. The euro/dollar has made a U-turn, now up to a nearly one-month high. The S&P 500 had shot over 2,000 but is now a bit higher at at 1,994....MORE
The Euro/dollar initially fell on ECB policy measures but then surged higher. (CLICK TO ENLARGE)