Today, President Mario Draghi guided the ECB Board to a status quo decision on the monetary policy of the EU. In yesterday’s NOTES, I opined that when Merkel and Draghi met in Berlin last Friday it was to receive the blessing from the Empress of Europe for a renewed effort at monetary stimulus. Chancellor Merkel was reticent to fan the flames of the AfD and other parties disillusioned with the present state of Germany’s position in the EU. The repression of German savers in an effort to bail out the European financial system is a below the surface issue for voters who are protesting in the streets against the ill-advised policy of a million refugees. Before Draghi can embark on more QE or some other unconventional monetary tool, GERMANY MUST BE SUPPORTIVE.
At the December ECB, meeting President Draghi seemed to fall short of market expectations because an executive board member was able to muster some votes against a more robust QE, greater than the present 60 billion euros. Draghi announced that the ECB will wait for the March meeting but he is very concerned about the lowered expectations for EU deflation. By waiting for the March meeting Draghi can only hope for two developments: First is Chancellor Merkel’s popularity and poll numbers improve as the refugee problems shift from the front page of German magazines and newspapers, or the European economy begins to falter, especially the German export machine.
Seven months ago I wrote a BLOG about the significance of the CHART OF DEUTSCHE BANK. I noted that the price level in U.S. dollars of $27.03 seemed significant because it was the low made the week of July 24, 2012 when Draghi delivered his famous “whatever it takes” to save the euro and the EU. It also was the week when the U.S. 2/10 curve made its low of 117.25, which is being tested this week. The Deutsche Bank low of $27.00 held until the end of September 2015 when the support finally was broken. Deutsche Bank stock closed at $18.78, taking out its low from the financial crisis levels of 2008-2009. The bank is important because it is deemed the crown jewel of European banking.
The lack of a fully developed corporate bond market in Europe has enabled the banks to maintain corporate finance, unlike in the U.S. where the corporate bond market and shadow banking sector has led to the banks being somewhat disintermediated. If there is renewed stress in the European financial system–a product of low inflation creating more non-performing loans (NPLs)–look for President Draghi to move, regardless of Merkel’s support. In an effort to rekindle the engine of monetary stimulus, the greater the financial stress the greater the possibility of the ECB undertaking some drastic action. President Draghi was asked about the recent stress tests conducted by the ECB and SSM on bank finances and danced around the issue by maintaining that European will much sounder than in the 2008 global financial crisis. Draghi’s lips may say yes but the stock prices of many European banks say NO.
***In yesterday’s BLOG I made a quick note to watch the gold/euro as an indicator on the market’s sentiment to the ECB‘s rate decision and Mario Draghi’s nuances during his press conference. The market’s initial response to the STATEMENT was a rally in the euro, a quick selloff in the sovereign debt and a very muted equity market response. The market changed direction even before Super Mario began the press conference and the EURO fell dramatically and the equities began to rally. Somebody was aware “DOWNSIDE RISKS HAVE RISEN.” GEOPOLITICAL RISKS HAVE INCREASED AND EURO INFLATION DYNAMICS HAVE SHIFTED DOWNWARD since the December meeting. BUT BY THE END OF THE DAY THE EURO CURRENCY WAS VIRTUALLY UNCHANGED BUT THE DAX AND SOVEREIGN BONDS HELD THEIR LATE MORNING GAINS.
The GOLD/EURO closed virtually unchanged by the 4:00 p.m. Globex settlement in Chicago at 1012 euros to an ounce of Gold. (The 200-day moving average comes in at 1023.0.) A more interesting chart is the gold/Swiss as the price level of 1107 Swiss francs to an ounce of gold is comfortably above the 1094.2 200-day moving average. I value the gold/Swiss relationship because variables are deemed HAVENS during times of FINANCIAL UNCERTAINTY. Again, it is not wars that drive GOLD higher and I have the scars on my P&L to prove geopolitics have very little lasting effect for gold prices. But if this chart, with what looks like an inverse head and shoulders formation on the daily continuation (CQG), this could prove a STAIRWAY TO HAVEN.