The original sell off in Eur/Usd was a formulaic 'lower Euro rates = lower Euro’ which would have fitted with basic algo programming but the turn from 1.0850 lows back and up through the 1.1000 magnet, that Eur/usd finds hard to move far away from, was blamed on the ‘no more deposit cuts’ comment. At which point the market claimed to interpret this as the ECB running out of ammo meaning we are at the end of CB effectiveness and so we have to run for the hills.
Gold ran for the log cabins, equities did a U-turn and rates were, well, wild. But though the narrative was convenient it didn’t fit all assets. If this was the end of CB effectiveness leading to the end of the world then no one had told the oil market and Dr Copper, though wobbly, was not tanking. Other risk indicators such as AUD/JPY retraced a bit but nothing in comparison to the falls elsewhere.
It was at best looking confused, which isn’t surprising as ECB policy announcements are not your average +/-25bp affairs and the devil is in the detail. Unfortunately detail isn’t something the markets like doing in the first minutes after an ECB announcement and with our algo friends chasing moves (and really struggling to translate complicated ECB transmission pathway wording into algo language), you only need the pack to set off in the wrong direction for the algos to drive them miles away from their final destination.
Though there are no prescribed further deposit rate cuts, Dr. Aghi has opened up a huge new highway in buying corporate bonds which could well lead to the road of equity purchases. This in its own right is a new Draghi Put and ’should' be exceptionally bullish for European equities.
The move of focus from cutting the deposit rate also implies the de-emphasis on using Euro FX rates as a channel of easing and allows the Fed room to hike. no deposit rate cuts it means fx channel of easing is no longer focus so allows the fed to hike. This may well also lead to currencies remaining more range bound with longer term volatility easing, even if our algo friends keep gamma high. With transference of FX drivers away from ECB, the Fed Factor will pick up and though European stocks will always be effected by exchange rates, they will no longer be responding to the same overall input implying that Eur/Usd and Estoxx correlations may well loosen.
There is complexity in the TLTRO announcement but the addition of lending incentives is very important. If a bank can lend over a threshold they can replace their senior bonds with TLTRO money. So if they have been under pressure with their credit widening, CDS pushing higher and their senior bonds suffering they can buy back their bonds at the lower prices with TLTRO money which means they have just monetised their Debt Valuation Adjustment (DVA being the profit that GAAP rules makes them post against falls in the value of their debt). Voila! A capital gain.
This is massively positive for Eurozone banks but it feels as though not everyone seems to think so and I’m wondering how long it will take markets to work this out. Do you remeber what happened after Dec 2012 LTRO? Back then we wrote a post singing its praises as a major turning point but the markets hated it and sold off heavily until the Italians issued bonds and everyone bought. Well this could be one of those moments.
On this basis I am looking for a sizeable rally in european stocks and risk in general, even if many in the market won't be happy until we have the recession they are demanding and pricing for.
Now finally for light hearted relief, for those folks who just love overlaying the present chart with a pattern from somewhere in the past to infer what the future entails, try this. It's the intraday Dow today.
And what happens next ?
Well obviously a T-wave repolarisation of the ventricles. Who needs charts of 1929, 1987, 2000 or 2008 when you have an ECG to follow. The heart beat of the market.