ECB Decision on Rates Backfires

This morning was the big - highly anticipated - moment for Mr. Draghi's interest rate reduction. And yes, it was reduced to ZERO. But he also announced several more measures in an effort to keep the liquidity healthy and financial markets stable.

By right, that should have resulted in European shares rallying, and the EUR weakening against world currencies. But that is NOT what happened!

DISASTER STRIKES

COMPARING EUR & DAX on 10-3-2016
SOURCE: Yahoo.Finance

The EUR rallied by nearly 2% against the SGD (19:00h, German time)

The DAX first rallied 2.5% but closed the day down 2.3%.

Somehow, I don't believe that this was the desired outcome!
Who is fooling who?
DAX_EUR Inverse relationship in February and
March, SOURCE: Yahoo.Finance.

Indeed, against the SGD, the Euro has been falling since February 10, 2016, from a high of 1.578 SGD. At the lowest point on March 7, it bought 1.51 SGD. Did this 5% swing in the currency pair occur in anticipation of Mr Draghi's new QE (LTRO) measure announcement?

The second chart shows a completely inverse relationship between EUR and the German DAX and is usually a sign of foreign money moving in and out of the market.  But that runs contrary to what Mr Draghi said should happen as he proposes to buy foreign assets with EUR. The EUR should therefore continue to weaken (selling the EUR) while stock and /or commodity prices should have rallied.

10-March-2016 Gold prices rock a soon
as Draghi speaks, SOURCE: BullionVault
Instead we see gold prices run riot after the announcement. This usually suggests that punters are running for cover!

Interestingly, the US markets also reacted badly in the first few hours after opening. However, they are now (21:00h German Time) regaining some of the losses, and in all likelihood may close the day even stevens.

Markets!! Sometimes - or should I say, "In the very short term", - market gyrations can defy any sense of logic. Someone panicked. But life goes on, and by tomorrow, Friday, we may see a complete reversal of today.

The next turn

Well if it is not corrected by tomorrow, it will probably do so, when the JCB announces its new liquidity measures next week Tuesday. Japan already works with a negative interest rate. Now, they will probably buy more foreign assets.  The goals are the same in Europe and in Japan: rekindle the animal spirit of the global economy, drum up some inflation, and allow the FED to continue with their plans for more interest rate hikes in the US.  

From a cyclical perspective however, indicators suggest that the new Japanese fiscal measures may end the same way as that of the ECB, - a flash in the pan. I therefore am taking steps to reduce the equity exposure in my portfolios. For what could follow does not look nice at all for equities - and currencies. 

This is no market place for the faint-hearted. 

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