Most of what the ECB did this morning matched the “Good” scenario in our ECB Preview:
- The ECB increased QE 20 billion per month, more than the 10-15 expectation. Result: Dovish.
- The ECB expanded the pool of bonds available for purchase in the QE program to include corporate bonds (we listed this possibility in our “Wildcard to Watch” section). Result: Dovish.
- The ECB cut the deposit rate 10 basis points, matching the 10 basis point expectation. Result: In line with expectations.
- Mario Draghi said the QE program will last until March 2017 and longer if needed. Result: In Line with Expectations.
So, at first glance, this was a positive meeting.
But again, what made this meeting go from a positive to (at best) neutral and potentially disappointing, were two specific events:
First, ECB President Mario Draghi said at the press conference that the ECB would not be instituting a “Tiered Deposit Rate” to alleviate profit concerns at European banks.
Second, he didn’t explicitly say that this is the end of rate cuts (leaving the possibility of even more negative rates in the future).
And, why these events are negative is no mystery to our subscribers because as we’ve explained consistently over the past month, negative interest rate policy (NIRP) was responsible for the 5% early February sell off because they are a major negative influence on banks.
What it Means for Markets Going Forward
Much of the recent rally in stocks (from 1950-2000 in our opinion) has been based on anticipation of positive outcomes to the ECB and Fed meeting. So, clearly this disappointment is a near term negative for the markets.
In tomorrow’s paid edition of The Sevens Report, we will provide our analysis on:
- What the ECB means for this relief rally (specifically is it over?)
- What allocation changes we think are warranted due to this news.
- What specific hedges advisors can consider if we see stocks roll over from here.
- The key leading indicator to watch going forward.
Given the lack of a tiered deposit rate from the ECB, European banks will once again become a leading indicator for global stock markets, so we will once again provide our favorite European bank index to subscribers, because just like in early February, that will be a leading indicator going forward.
Bottom line, while the ECB did do more than expected on the accommodation front today, they again showed they don’t truly understand the market, and as a result they are causing confusion and an uptick in volatility.
We will make sure our subscribers understand, tomorrow morning at 7 AM, the medium term implications of the ECB meeting so they can 1) Explain what’s happening to their clients and 2) Make changes to client portfolios if necessary.