OK, referencing little war time ditties probably isn’t the most politically correct thing to do when talking about the ECB – but it made me chuckle.
Yesterday’s utterly, utterly pointless decision by Europe’s central bank to lower interest rates by a whopping 0.25% to 0.25% smacks of desperation and has convinced me the fear-on trade is due an almighty come back. In the last month we’ve seen the Fed’s nerve fail catastrophically, Carney suggest the BoE isn’t yet done in its efforts to prop up the financial sector and the Bank of Japan carry on with its extraordinary printing operation.
Central banks and governments around the world have thrown in the towel. They are out of options. The measures they’ve employed have failed. There is much more pain to come, yet markets continue to defy gravity. Even so, the underlying truth is that the financial situation is so bad that the various crises of the last few years are certain to reignite.
As we keep repeating at SpreadBet Magazine – nothing has been solved!
Europe is a perfect case in point. Over the last six months I’ve read all manner of commentary that Europe is on the mend, Europe is coming out of recession, Europe has put the worst behind it etc. etc. etc.
If this were true, in any meaningful sense, why is it that the ECB decided to act as it has?
As ever in life, it always pays to look at what people do, not listen to what people say.
The move to lower rates is baffling. Well, when I say “baffling” this is Europe we are talking about where up is down, left is right and black is white, so probably it makes perfect sense. However, in the real world it hardly inspires confidence. Although the 0.25% drop now means that European rates are aligned with American ones, the signals this sends out betray obvious worries at what is coming.
A 0.25% drop in rates will do little to nothing to boost output. Sure it will knock the Euro lower, which apparently will help exporters, but the other major central banks are all playing exactly the same game. Any benefits Europe derives from their latest step in the “race to the bottom” will likely prove short-lived as one member or more of the pack responds with more stimulus of their own.
Given that economic output was meant to be improving across the Eurozone it is even harder to see the economic justification for this move. Without this justification, this must mean the rate drop was aimed at helping Europe’s battered banks. Of course this isn’t the official line, but I wouldn’t be surprised if this ailing group is the real target of the ECB’s largesse.
We all know that any number of Europe’s banks have been teetering on the edge for years. Without state support, overt of otherwise, many of them simply would not have survived. To be honest many of them don’t deserve to survive and will ultimately fail.
Last year Mario Draghi managed to pull off perhaps the greatest monetarist conjuror’s trick in recent times. His famous “whatever it takes” statement hoodwinked the market into believing shorting Europe would be a suicidal trade. Without having to resort to the same sort or scale of QE his American and Japanese counterparts, Mr Draghi deftly helped ensure difficult questions of Mrs Merkel in the German election were not asked. Now that’s out of the way the landscape has changed.
The Japanese and American experience tells us exactly how ineffective marginal rate cuts are at stimulating genuine growth. Therefore, full QE has to be back on the table at the ECB. Even staunch German opposition to this might wane as Japan’s Abenomics gobbles up more global manufacturing market share.
As much as this all will have to end in tears at some point, for the time being going short the Euro and long European stocks look like the positions to take. Just hold your nose when you do!