The European Central Bank moved last night to expand its already huge and complex easing program by making it larger and more complex, and in doing so confused markets.
Shares rose in Europe, then fell, the euro fell sharply, then surged just as sharply and we ended a session of trading that left us none the wiser, except there are still a lot of nervous traders out there.
Our market should start today’s session with a small gain after being in the red for much of the session.
The ECB meeting actually ended a busy 24 hours for central banks – the Bank of Canada sat on rates, the RBNZ cut its key rate to a record low and the ECB went ‘wham’ and lifted its bond buying by a third to 80 billion euros of bonds a month (now including corporate bonds (the bank’s key interest rate was dropped to minus 0.40% from minus 0.30%, and a new scheme was introduced whereby the ECB will lend money to banks to on lend to customers, and pay them!
That sounds like the reverse of the negative deposit rate and is aimed at encouraging banks with cheaper short-term loans and longer-term liquidity at negative interest rates — or, paying eurozone lenders to increase credit to households and companies.
But the comment that hit the euro and markets was the strong statement at a press conference by ECB head, Mario Draghi, that interest rates would stay low for “an extended period” and while he kept open the option of a further cut, he then put a limit on any further cuts..
"Does it mean we can go as low as we want without having any consequences on the banking system? The answer is no,” he told the press conference, and sent the euro soaring. It had fallen to just over $US1.08 on news of the expansion of the spending and the increase in the size of the negative deposit rate, then zoomed more than 4 euros to close just over $US1.12.
It was a wild day and the US dollar wobbled as well, but the Aussie barely budged, dipping to around 74.40 US cents. Gold jumped, oil fell , as did other commodities, although some of the falls were pared in late and after hours trading. Iron ore prices dipped 0.2% to $US57.92 a tonne
European share markets sold off sharply (but not the Spanish market) after Asian markets weakened (Shanghai by more than 2%, making for an interesting start today).
In London, BHP Billiton shares fell 5% and Rio 3.6%, setting up a rough day on the ASX today for big miners. Our market went from a fall, to a small gain on the futures market, in tandem with Wall Street where large first up losses had all bust disappeared by the close.
Markets will take more time to sort out their reaction to the ECB’s move – the negative interest rates regime is starting to worry more and more bank regulators, shareholders and economists.
