Must-Read: : Draghi Day: “Rabobank describes the wild market moves that followed the European Central Bank rates decision and press conference as ‘carnage’…
…Whether that’s the ECB’s fault or the markets’ depends on who you speak to. Here’s a taste…. Jim Reid at Deutsche Bank sees signs of a strop in the market…. “Imagine you were expecting a trip during school holidays in a caravan around the country but instead you can take 2 weeks off school, fly first class to Disneyworld, have a go in the cockpit on the way, stay at a hotel made of chocolate, and then be able to go on every ride every day without queuing and have a private play session with the real Mickey Mouse as each day draws to a close. However if the market was the same kid its reaction yesterday was ‘do I not get unlimited spending money, and where are we going for our summer holidays then?’”…
Frederik Ducrozet at Pictet says ‘don’t fight the ECB’: “Such a policy package designed to boost bank lending and to improve QE implementation should lead to a significant easing of monetary and financial conditions. We are positive on the net impact….” Peter Schaffrik at RBC: “We do not share the negativity and could well imagine that the initiative to engage in risky assets will find more coverage going forward.”… And the economics team at BNP Paribas….
Now for the critics…. Lutz Karpowitz from Commerzbank says the central bank is ‘firing blanks’. He has issues with TLTRO 2, where the banks can effectively fund their lending at negative rates from the ECB…. Grant Lewis from Daiwa…. “The cost of finance is only one consideration for banks when deciding whether to lend or not – of at least equal importance is how the underlying economy, and hence the loan itself, is expected to perform. And on that measure it’s far from certain that today’s announcements will prove transformative to the economic outlook. Indeed, the ECB’s own forecast for 2017 sees growth of just 1.7% and inflation well below target at just 1.3%.” Rabobank’s Piotr Matys says ECB can forget about talking the euro down: “The damage to bearish bets against the euro, however, has been done. Those market participants, including yours truly, who went into the ECB meeting with a bearish view on the euro ended Thursday’s session calculating their losses instead of celebrating profits… after such a massive blow as on Thursday Draghi and other ECB officials may find it even more difficult, if they choose to do so, to talk the euro down.”
Citi‘s rates team says Draghi’s bazooka has ‘backfired’: “The bazooka backfired because the ECB is taking rate cuts off the table. We expect easing to be priced out. The measures do little to convince us that realised inflation will move higher any time soon.” That said, the same bank’s emerging-markets team says ‘the ECB delivered’: “There is now an incentive to move away from a policy fully centered on negative rates, to a toolset centered on further relief of financing in the banking sector. The markets should be cheering that, rather than reacting in a negative way.”