Europe Foils on Scanty QE


Last week, situation in the Eurozone has noticeably changed. It’s all right, the Quantitative easing stays in its place and the ECB rates keep on falling. At the same time, the era when everyone got used to any appearance of Draghi being a dovish intervention may be coming to an end.

On December 3, the deposit facility of the Euro System was lowered by 0.1 percentage points, reaching its all-time bottom at -0.30%. The fixed rate for main refinancing operations was left at 0.05%. Additionally, Mario Draghi revealed ECB plans to continue monthly purchase of securities amounting to 60 bill EUR.

However, this turned out not to be enough for the markets. Considering the second year of ECB failing to reach its inflation goal “close, but lower than 2%” with many countries experiencing deflation, a bolder move was awaited. Since deposit facility remained constant for 14 months, expectations about the new rate varied between -0.30% and -0.35%. Due to this fact, the Thursday move was at first perceived as ECB “delivering at the lowest end of expectations”. However, the markets plummeted, because no one expected Draghi to leave the amount of monthly liquidity injections at 60 bill EUR. Figures of 75 and 80 billion per month were most popular among analysts on the previous week.

With fewer “cheap euros” expected, European markets did not take too long to react. FTSE 300 lost more than 3% of its value at the end of the trading session, and the main German stock index DAX was down by 5.5%. France went into the red zone as well, with CAC 40 losing almost 6% of its value. At the same time, the euro appreciated from its eight-month lows at 1.05 to levels just below 1.10, experiencing the second strongest day against the dollar in its history.

After the “Draghi disappointment”, as many columnists have dubbed the scanty easing, markets are reviewing their expectations of further expansion strategy of the ECB. Draghi’s message is now fully digested: ECB does not hurry, the rates will stay low for a longer period, which follows from extension of the security purchase program from December 2016 to March 2017. Deutsche Bank sees threat coming from the strong euro and point to a probable downward revision of the EU GDP forecast for 2016 by 0.2%. Barclays called “challenged” its 1-month forecast of EUR/USD at 1.03. At the same time, it leaves its long-term goal of 0.95 unchanged.

Traditionally, the forecasts of any Central Bank are viewed as biased, since monetary regulation is their main function and they are the involved party. And yet we see the opposite situation, when those are the investment banks and influential private analysts who have been overestimation the depreciation of the euro for a year – and the forecast of the ECB for EUR/USD stable at 1.10 during the year 2015 seems to be coming true. It is too early to talk about any lessons the market can learn from the last week, but we can expect to hear more often: “Listen to what ECB says!”