On a disappointing new ECB Stimulus package, stocks around the world sold off in true “sell on the facts” fashion, following the ECB announcements.
European Central Bank President Mario Draghi and his policy-making compatriots delivered a bigger-than-expected stimulus plan Thursday, but also signaled that policy makers aren’t likely to further cut interest rates—sending a mixed signal to investors. (In other words, they don’t want to scare off bond buyers but they have and that was reflected in today’s plunging markets in the ECB latest desperate central bank move).
The ECB reduced the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible.
What I found disturbing is the ECB’s decision to expand the eligible assets of its government bond purchases to include euro-denominated “corporate” bonds from outside the financial sector. This is an extremely aggressive signal, because it signals the central bankers are running into a liquidity problem, unable to unload these corporate bonds to unwilling investors, so they are essentially monetizing corporate bond debt. The ECB is taking this (bad debt likely energy debt) on their balance sheets to absorb it in order to take it off the balance sheets of big banks – likely big US banks!
This reflects very poorly on the central bankers once again. Is it any wonder that debt will skyrocket and further credit company downgrades will follow?
Today’s European Central Bank’s announcement has set in motion a number of markets.
First, on the currency front the ECB is significantly undercutting the euro. However, the central bankers hammered the US dollar today after it initially surged. The Fed wants it discounted before the euro begins to slide but now the US dollar is oversold with the RSI value at 27 and the daily stochastics at %K 7 and %D 26. This suggests the dollar is poised to climb if the Fed doesn’t roll out a QE of its own. In other words, we have a currency war with Europe, Japan and China all aggressively discounting their currencies.
