Two central banks announced interest rate decisions today: the Bank of Canada (BOC) and the Reserve Bank of New Zealand (RBNZ). The BOC left rates at 0.50% while the RBNZ SURPRISED markets by lowing its official cash rate by 0.25% to 2.25% as Governor Graeme Wheeler revealed concerns about a slowing Chinese economy and the ever-increasing global financial risks. There was no specific mention about the KIWI but Wheeler voiced concerns about the downward pressure on DAIRY EXPORT PRICES. The KIWI dropped 2 percent against the U.S. and Australian dollars following the surprise move but the explicit notation of slowing Chinese growth should be an alarm for those concerned about the impact of China on global commodity prices.
The BOC was content to allow rates to remain at its current level as the recent rise in energy export prices and the announcement from the Trudeau Government about fiscal stimulus plans should provide enough comfort for the BOC for growth in Canada. The Canadian unemployment data and trade numbers will provide the evidence on which to evaluate the BOC’s decision.
Tomorrow is a key day for global markets as the ECB will announce its RATES decision and the POTENTIAL for increased LARGE SCALE ASSET PURCHASES, or QE. There are all sorts of probabilities put forward about whether or not the ECB will increase QE by 10 or 20 billion euros a month and to what levels the ECB will lower the negative rates on reserve deposits. The guesses are dropping the NIRP t0 -40 or 50 basis points from -30. The announcement is at 6:45 a.m. CST, followed by the Draghi statement and press conference at 7:30 a.m. I URGE PATIENCE AS THE ALGO HEADLINE READERS WILL BE IN MAJOR VOLATILITY CREATING MODE. If the ECB announces no change at 6:45 the euro will rally and EQUITIES AND BONDS will be sold. IF THERE’S NO CHANGE IN THE CURRENT POLICY THEN THE DRAGHI PRESS CONFERENCE WILL BE FILLED WITH ALL SORTS OF CONDITIONAL AGGRESSIVE POLICIES IN THE VEIN OF WHATEVER IT TAKES AND/OR NO TABOOS.
Remember, President Draghi is a master manipulator and has done more with less–as far as moving the markets–than any other central banker. If the ECB does less than the market is anticipating be prepared for Draghi to put heavy emphasis on the need for Brussels to enact the Juncker Plan, which is a massive European-wide infrastructure investment project. The question for traders is what could Draghi do as far as projecting MONETARY STIMULUS PLANS IN A NEGATIVE RATE ENVIRONMENT.
1.Of course the obvious move is to extend the duration of QE from March 2017 until no official end date and increase size of purchases to 70 or 80 billion euros a month from 60 billion. This has not been effective wherever it has been enacted so the market reaction may be less tepid than many assume.
2. Draghi could announce that the ECB was changing the quality of the assets it will purchase by allowing the bank to absorb NONperforming loans from a multitude of European banks. On Monday, there was an article by Michael Snyder titled, “The Collapse of Italy’s Banks Threatens to Plunge the European Financial System Into Chaos” in which Snyder denotes the idea that with NPLs measuring up to 17% of all bank loans the Italian banking system is in severe crisis. Mario Draghi may use his powerful position to aid his fellow Italians but this will cause great unease within the hard money voices on the ECB.
At tomorrow’s ECB meeting Bundesbank President Jens Weidmann is a NON-VOTER because of the ECB’s rotation system (similar to the Fed’s but the ECB does it on a meeting by meeting basis) and this may be a moment in which the ECB president will have to assert his will even though Weidmann will certainly be an opposition voice.
3. As I noted in a recent blog post, pay attention to any announcement about any change in the legally imposed capital key as this will be a no taboos instrument. Bottom line for the Germans will be Draghi’s attempt to load the ECB with sub-prime paper in an effort to place an enormous financial burden on the German electorate through the BACK DOOR
4. Time is running out on Draghi and the German elections over the weekend may undermine the authority of Chancellor Merkel and remove Draghi’s main basis of support for monetary stimulus. Along with Draghi’s fear of the Bundesbank is the Eurocrats fear of the coming Brexit vote. While the talking heads are promoting the fear of financial instability if Britain leaves the EU, that is an unknown which I would not give much weight to. It will be the potential political instability from a rash of referenda by other members of the EU, which will cause the most instability. Couple that with this week’s ridiculous policy on the refugees and Turkey and the sense that Europe is leaderless and clueless is very real. TRUMP THAT. Oh well, just a day in the life in a world moving from crisis to crisis.
Tags: BOC, Bundesbank, ECB, Mario Draghi, New Zealand dollar, NIRP, QE, RBNZ
March 9, 2016 at 10:06 pm |
Draghi’s Dilemma
Doing nothing even if accompanied by conditional aggressive policy verbiage will once again lead to potential serious equity market weakness as jawboning has by now led to lockjaw and derision, as fundamentals continue to weaken.
Raising QE, a proven failed option, which includes sub-prime paper, may lead to the burghers revolt and seriously weaken an unsteady Merkel government, already in deep trouble with her immigration policy and continued news reports of Deutche fraulines sexual violations by guests from the Levant. Far right parties would gain further strength.
Across the Channel additional arguments for Brexit will gain momentum in this scenario. London’s mayor has higher political ambitions and has the pulse of the voter as the hirsute presidential candidate has in the Colonies.
Long term the Euro will go the way of the Continental, but between now and then traders will be playing with each other.
March 10, 2016 at 6:11 am |
Asherz–agree with you on Brexit and am closely monitoring the forward spreads and of course the bookies
March 10, 2016 at 7:48 am |
Draghi shot his load, pulling out all stops, with some positive surprises for the bulls. The markets reacted by resembling the latest Iranian missile test. However the contrails are nothing more than white poofs of smoke, as in a short time they dissipate with the winds.
The lender is not the problem. The borrowers are diffident and the string refuses to be pushed, and curls up in a fetal position.
The economic fundamentals continue to weaken with top and bottom lines negative, as debt levels keep rising, both encouraging keeping one’s head down. Bulls are having their day, as the punchbowl has the vodka bottle emptied into the beverage. However the morning after will arrive with a massive headache,
Gold in this scenario should be soaring but with risk on and Central Bank interventions, (with COT obscenely listing to the short side), have recently weakened.
But if Draghi is intent on weakening his currency, with QE and NIRP, he will eventually succeed. Unprecedented stagflation will follow at some point, destroying the Euro with precious metals following the trajectory of the late 70s. These will not be contrails and smoke and mirrors, but the real thing.
What will Draghi do next as the curtain falls on his last hurrah.
March 10, 2016 at 8:08 am |
My only guess is that the Fed will now have to jump in with QE or negative rates? The USD spiked, then sold off… why? I cannot believe gold isn’t shooting up on this news…
March 10, 2016 at 8:23 am |
rockeye –I will be on with santelli this morning at 9:40 and hiopefully will discuss this but GOLD has rallied 25 dollars since the market has begun to understand the unadulterated B.S. going on and GOLD broke initially because algos were pegged to the dollar rally and sold gold on dollar strength
March 10, 2016 at 8:20 am |
The Germany stalls, the euro falls.
March 10, 2016 at 8:24 am |
Arthur –i think i totally disagree with that view
March 10, 2016 at 8:41 am |
Is Mr Slick losing it a touch?
He certainly wasn’t as slick as he normally is?
Yellon lost it recently remember.
Whatever the case, the trading during that press conference was as beautiful as usual. Folks, there’s a GOLD MINE in profit potential with the press conferences.
A cleverer man than me would trade only for 2 hours every press conference and then hit the beach till the next one.
March 10, 2016 at 9:07 am |
Alex–the musings of a very mature trader
March 10, 2016 at 10:34 am |
That was a nice pop for reloading short, big head fake leading into Draghi’s dog and pony show.
March 10, 2016 at 11:17 am |
Draghi – is so full of crap he over ran his quota and let the vice -president of the ECB speak more then usual
March 10, 2016 at 12:51 pm |
He’s not the only one, based on my observations. Surprised market even moved up, must be patient shorts looking to tick a top.
March 10, 2016 at 8:39 pm
72% of stocks closed lower on this side of the pond, late day tape painting to spruce up indices.
March 10, 2016 at 3:34 pm |
I know this is absolutely PATHETIC, but can someone please post a synopsis of Yra’s interview on Santelli today as I do not have CNBC nor do I have a pro subscription…
March 10, 2016 at 5:06 pm |
rockeye will be out in 2 hours or so–thanks for asking
March 10, 2016 at 5:06 pm |
rockeye–I am posting the hit tonight with a complete review of the ECB wil be out in two hours or so
March 10, 2016 at 5:15 pm |
So Mario called the low in interest rates today? He admitted, that the ECB can´t go lower because of “complexity” in the Eurozone. They would hit the banks in southern Europe, which have a huge percentage in variable interest rate mortages.
see: http://si.wsj.net/public/resources/images/BN-MX599_floati_P_20160304103308.jpg
->so, if there isn´t any fantasy for further rate cuts – will the bond market do the logical thing and slowly start selling? The Euro thinks so…
March 10, 2016 at 8:47 pm |
Green AB—you are going to become a critical conduit for all things German–keep us posted with your high quality info