The president of the European Central Bank, Mario Draghi, disappointed the markets yesterday afternoon.
Following the bold and somewhat aggressive statements that the ECB would do what it takes to get the European economy moving, the markets were expecting to see a decisive move that would put these words into action.
However, instead of getting QE2, the ECB gave us a fudge that at best can be described as QE1 and a bit.
The shock that spread through the markets following what was a rather meek announcement sent the euro surging higher against its pairs. The ECB’s decision led to a selloff in asset classes as equities and bond values collapsed.
We looked for clarity during a very stormy afternoon trading session. The speech delivered by Mr. Draghi was long but lacked any real content. What the speech did tell us was that the ECB had introduced new measures that failed to meet the market’s expectations.
Expectations were high and much was promised but little delivered. The ECB had failed to stick to the forward guidance and tough language that it made earlier in the autumn. As such, this is a major failure to communicate by a central bank in a lead up to such a key meeting.
The shock of what happened yesterday will only be eclipsed if the United States Federal Reserve now fails to deliver an interest rate increase later in December.
With such a large failure to deliver, it was not a surprise to see euro/dollar spike higher by over 450 pips in one day as the market scrambled to cover short positions as traders adjusted their trading plans.
The market had expected an expansion of the QE programme, however, what we got was:
- The deposit facility rate was cut by a mere 10 basis points.
- The QE programme was not expanded apart from adding some new assets.
- An extension of the current QE programme to March 2017. The market wanted to see the date pushed back further to mid or late 2017.
With the ECB’s inaction this morning being digested by the markets, traders are now wary in believing what will be said in the future. Furthermore, the markets will now have to adjust its strategy that focused on a short euro as there is now confusion over the next step the ECB will take. Is it a case that this is it and there will be no further expansion in the QE programme or has Mario Draghi now left himself room to implement additional measures if required?
On the flip side, the Federal Reserve, seeing the euro surge, now has more room to maneuver. Following the ECB announcement, the markets are already pricing in a higher possibility of a US interest rate rise.
The markets will now be waiting nervously for today’s US jobs report. A good report will give Janet Yellen at the FOMC the signal to push ahead and increase interest rates at the next meeting. However, with the market continually being surprised by event risk, a disappointing Non-Farm Payrolls and Average Earnings report could send the US dollar longs scrambling for cover as EUR/USD is sent surging to the 1.1000 level.
December was meant to be a quiet month with traders squaring up positions as minds focused on festive celebrations and making plans for 2016. However, it appears that during this December, fortunes will be made and lost as the uncertainty continues to rattle the nerves of traders.