The Good, The Bad, And The Petulant Child: Three "Morning After" Reactions To The ECB’s All-In Gamble
By Tyler Durden
As can be seen by the violently volatile markets themselves, over the past 24 hours there has been substantial confusion about the implications of the ECB’s “all in” gamble, with the initial kneejerk euphoria leading to a rapid selloff and surge in the USD, followed by an overnight levitation in all risk assets as virtually the entire ECB move has now been faded on both sides.
Still, much confusion remains as can be seen by the following three reactions by financial pundits, two of whom even work for the same company.
First, here is Bloomberg’s Mark Cudmore with “The Good“:
“The euro is stronger, therefore the European Central Bank’s new policy measures have failed.” That seems to be the dominant sentiment after Thursday’s expansion of stimulus. But far from disappointing, the ECB’s shift to focus on the credit channel over the FX channel is a master-stroke -– if only markets can catch up with them.
It seems to have been forgotten that exchange rates are not the ultimate target of central bank policy -– even by some central banks themselves. A weaker exchange rate is a means to an end, not the end itself. And it’s just one of several tools a central bank has at its disposal, not the only one
Analysts’ misplaced focus on the currency means they’re confusing the bigger picture. They spend weeks criticizing negative rates and then bemoan the fact the ECB says it won’t go even more negative
European banks have been in a bad place the last few months, not least due to struggling with negative rates. As of yesterday and the advent of the ECB’s new four-year T-LTROs (targeted longer-term refinancing operations), banks will now be paid to both borrow and lend. That’s one problem solved. And with a simultaneous boost to lending
After a week many commentators criticizing China for focusing on further credit growth to stimulate the economy, the ECB have followed suit. And whatever else you can say about each country’s monetary policy, they are definitely reflationary. This will be a boost to commodities, and also emerging markets over time
The euro zone has a structural deflation problem, partially caused by labor market reforms in the region, and yesterday’s moves may not solve it. But they are an innovative and ambitious step in the right direction, and they should at least help headline inflation tick higher over time
These policies aren’t even long-term euro-positive –- they’re just smart moves which have caught euro zone bears offside in the short-term
Then, here is Bloomberg’s Richard Breslow with “The Bad“:
If I were ill and there was only one doctor in town, I’d still make an appointment even if my complaint was chest pains and the sign over the door read “fallen arches a specialty.” The ECB is being forced …read more
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