The European Central Bank met yesterday morning, and the expectation going in was that they need to do something drastic. In the past, ECB President Mario Draghi said they would do anything it takes, but ultimately disappointed. This time around, analysts expected a cut in interest rates, which were already negative, and an increase in their asset purchases or QE.
Well, the ECB delivered.
On top of cutting the rate by 10 basis points as expected, the ECB increased their asset purchases by 20 billion euros, which was a lot more than expected. And now, those purchases will include non-bank corporate debt. There are only so many government bonds they can buy, so why not try something else!? The ECB also surprised by cutting the interest rate on their main refinancing operation to that all-important level of 0%.
Overall, this policy will help drive down rates on bonds, savings, and mortgages. Supposedly this will encourage savers to spend and stimulate the economy, and this stimulation will also supposedly encourage banks to lend.
But what if it doesn’t?
This negative rate policy already failed in Japan. The Bank of Japan (BoJ) tried going negative but quickly backed off when it back-fired. The goal was to weaken their currency and to get stocks to go higher.
Well, the opposite happened. The currency got stronger and even forced us out of a bearish trade on the yen in Boom & Bust that we’d been building the past couple years. (We collected nearly 100% on this trade and there’s a chance we’ll get into it again at some point when all this dies down a bit.)
Clearly, here is a central bank that will do anything to stimulate their economy. But it’s not working. And just today, we’re already starting to see the same thing happen in Europe.
Following the policy announcement the euro traded lower and stocks were up. As the day has gone on, that’s reversed. Stocks have turned lower and the euro’s up again. Back where they started!
