In what has been an eagerly anticipated week, with three important central bank statements due, investors were left scratching their hands today with no clear answers from any of them. First, the Federal Reserve just “kicked the can down the road” once more to September concerning any further monetary easing out of them. There was a great deal of speculation on further potential unconventional policy tools that the “Bernanke” could throw at the economy but, in the end, the best tool that Bernanke seemed to have in his box was the tantalisation that he may do something further. Monetary easing seems to be exhausted in the US, and although the US economy is growing albeit at a frustrating slow rate, it is still growing after all, so why waste the last bullet?
The reaction to the lack of monetary easing in the US was mildly negative. The Dow lost 55 points in just five minutes after the FED announcement. Similarly, Gold that was also abandoned by investors seeking the safe asset du jour – the US Dollar. Nevertheless, investors still expect another bout of QE this time to be unveiled on September 13, when the next FED meeting will occur.
With the FED disappointing, all eyes then re-focused on today’s BOE and ECB meetings. Some expected the BOE to extend its monetary easing program or, maybe to audaciously lower its key interest rate to 0.25%. In the event, that didn’t happen. Even though the IMF has been stating that the UK may need further accommodative monetary policy following the GDP figures for the second quarter that shockingly revealed a 0.7% dip, the BOE kept both its £375bn QE program and the interest rate on hold at 0.5%.
Having been disappointed twice in less than 24 hours, investors still hung their hat on “Super Mario” Draghi and couldn’t guess that they would be further tripped up again… But they were… The ECB kept its key rate unchanged at 0.75% level and there was no definitive talk of out of Draghi of long end bond buying. Comments such as “inflation is likely to decline further”, “growth remains weak”, “high yields are a problem”, “Euro framework is irreversible” and, the strong wording “the ECB may undertake outright open market operations” all were intended to soothe but in fact as can be seen from the closing prints on the day with Spain and Italy reversing by almost 8%, Draghi fell well short of their expectations.
What investors were expecting o hear the ECB say was they they are willing to implement these measures now and not just ‘possibly’ in the event that matters deteriorate further. The Euro also put in a volte face and fell sharply towards the 1.21 level – indicating a move below 1.20 is on the cards in the days ahead…
Unlike last week in London, Mario Draghi was just not persuasive enough and simply left the status quo. It looks to us like those pesky Geeermans are putting the kibbosh on matters again – the Bundesbank simply cannot tolerate the potential of unleashing inflation it seems and so Draghi’s rhetoric of last week turned out to be just that – rhetoric. His remark – “it’s pointless to be short on the Euro” left me choking on my tea and was an open season invite to those pesky hedge funds to really have a go at it now.
It will be tough to trade the Euro in the next few weeks but there is an intriguing upside risk/potential deriving from the possibility that the ECB makes a surprise move to buy sovereign debt. Draghi warned us…
And so a week that was expected by many to deliver the beginnings of a real end to the Euro-region sovereign debt crisis ended on a sour note. Europe’s central bank and politicians are now preparing for their vacation during the long hot month of August – perhaps we should all follow suit?
Filipe R Costa & Editor