Binary bets of the week & Why The ECB Can’t Go Far Enough by Dave Evans of

4 mins. to read

The ECB took centre stage on Thursday as Mario Draghi unveiled the ECB’s big push to combat the Eurozone’s growth and deflation problems. The headline measures include an MRO rate cut down to 0.15% and the introduction of a negative deposit rate. There were other measures adopted, though the ECB stopped short of initiating Quantitative Easing activities.

But is it enough? Markets have taken some initial cheer from the activities, but the nagging fear amongst some market participants is that ECB itself cannot do enough. Even as investors ready themselves for an even easier policy further down the line – with full-fledged quantitative easing available as a last resort, the suspicion is that the fundamental problems will remain unaddressed.

Will the ECB’s latest measures indeed increase private lending as intended? For this, we only have to look at private lending rates in the UK to see that while they have picked up post-recession, they have hardly rocketed. In fact, the cautious rebound in private lending is actually being used as a counter argument to claims that the UK’s housing bubble is unsustainable!

The Eurozone’s growth problem can only really be addressed by structural reforms or a depreciation in the value of the euro. Holiday makers heading to Greece this summer will know too well that while the fair isles are cheaper than they were pre-crash, certain things are still more expensive than might be expected. Ultimately, a euro in Germany is still worth the same as a euro in Greece and therein lies the problem of the Eurozone.

Structural reforms need to be applied to boost growth in the peripheral regions, but without closer integration, these reforms will be extremely difficult to apply. The ECB has been helped by a general return to growth across the world in the last year, but the Eurozone is still lagging its peers.

In the longer term, the Eurozone may find that even quantitative easing isn’t enough, sparking a panic that may finally force European powers into drafting those much needed structural reforms. In the short term, the ECB may just have bought itself some breathing space again.

Since the start of the Eurozone crisis, there has been a pattern of crisis followed by short term measures that kick the bigger problems into the long grass. The key here is that markets for whatever reason have acted to support the ECB Eurozone powers every time – at least in the short term.

EUR/ USD Weekly Chart

The same pattern could well play itself out here as markets ride the short term wave. A good way to play this is with a One Touch trade from rather than a more generally bullish trade. As for the reasons already expressed, any rally may be short term in its outlook, especially as the deeper structural problems remain untouched.

A One Touch trade means the market has to touch the defined strike price within the set period. A One Touch trade on the EUR/ USD predicting that it will touch 1.3825 at some point in the next 31 days could return 157% if successful. A £10 binary bet stake could potentially return £25.54.

Sell In May?

One stock market adage that left active investors burned last year was ‘Sell in May’. Also known as the Halloween indicator, the general gist is that stock markets perform best in the period from November until the next April. Stock market history does bear this out, with the vast majority of stock market gains occurring during the winter months. However, it is not true to say that summer is a time to sell. Generally, the summer months have underperformed, but overall have not been loss making.

Indeed, in 2013, anyone heeding the “Sell in May” warning on the S&P 500 would have missed out on gains of around 10%!

Now with stock markets even higher there is the temptation to label markets over-bought. There is some evidence for this, with Professor Robert Shiller’s Cyclically Adjusted P/E ratio hitting its highest level since 2007.

Shiller’s CAPE

This CAPE level is high by the long term historical standards of stock markets, but is still some way off the heady days of the tech boom. Just as Eurozone watchers are prepared to suspend their concerns while markets keep going up, stock markets can remain irrational and ‘overbought’ for some time.

At this time, the short term implications of the ECB’s activities may just trump the seasonal bearish bias and keep markets around the highs for a little while longer. Upside may be limited from here, so a range focused trade might work best.

FTSE 100 Daily Chart

An IN/ OUT trade predicting that the FTSE 100 will close between 6,850 and 6,650 in 31 days time could return 163%. That’s a potential return of £26.26 from a £10 binary stake. 

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