European markets suffer biggest selloff since September
And finally.... European stock markets have posted their biggest losses in over two months.
Shares fell sharply after Mario Draghi failed to deliver the major stimulus packages which had been expected.
The wave of selling rippled from Frankfurt and Paris to Madrid and Milan, as traders expressed disappointment that the ECB hadn’t expanded its QE programme, or hit the banks with tougher negative interest rates.
Every share on the German DAX closed slower, sending the index down by 3.5% -- which looks like its biggest one-day decline since mid-September.
The London also fell sharply in sympathy. The FTSE 100 shed 145 points, or over 2%.
The euro, though, continues to drive higher - and is currently up around 3%.
Tony Cross of Trustnet Direct says the ECB triggered a wave of selling.
All eyes were on the ECB and the expectation that Mario Draghi would unleash some weighty stimulus measures in another attempt to kick-start the Eurozone economy.
Although the deposit rate was cut, the market had been factoring in a drop of more than the delivered 10 basis points here, whilst the extension of the bond-buying programme had been fully priced in, too. The result has been a sweeping sell-off for stocks, both within the Eurozone and also in the UK.
While Jasper Lawler of CMC Markets explains how the ECB came up short, despite announcing new stimulus measures.
Every metric of the ECB’s easing was less than expected by markets.
The ECB cut the deposit rate by the minimum amount expected, extended the length of QE program by six months when the market was looking for 12 months and expanded the pool of assets available for purchase without increasing the size of monthly purchases.
That’s all for today.
My earlier summary explains the main action today.
We’ll be back tomorrow morning for another big day - with the latest US jobs report on the agenda. Thanks for reading and commenting. GW
Updated
Jens Nordvig, analyst at Japanese bank Nomura, reckons the ECB’s hawks refused to accept deeper stimulus measures today:
" the outcome today... may signal that President Mario Draghi faced pronounced opposition within the council" -- Nomura's Jens Nordvig
— Joseph Weisenthal (@TheStalwart) December 3, 2015
Our economics editor, Larry Elliott, reckons the euro’s rally will be short-lived:
The euro had been pushed lower and stock markets had been driven higher in expectation that the ECB would do something meaningful. When it didn’t, the markets unwound the positions built in advance of Draghi’s announcement.
The smart money will be on the euro’s rise being temporary. After all, it is widely expected that the Federal Reserve will raise US interest rates for the first time since 2006 when it meets this month. But talk of a further big plunge in the euro look overdone. An increase in US borrowing costs is already in the price. And Draghi has shown all too vividly that the hints of central bankers – even the biggest hints – should be treated with some caution.
Here’s his analysis of today’s news:
Here’s Reuters’ take on the surging euro:
The euro was on track for its biggest daily gain since mid-March on Thursday as a series of stimulus measures announced by the European Central Bank failed to live up to market expectations.
The ECB extended its asset-purchase programme, known as quantitative easing, by six months to March 2017, but did not beef up monthly purchases as many investors had hoped.
It also agreed to buy euro-denominated municipal and regional bonds and cut its deposit rates by 10 basis points to -0.30%, although this was slightly less than money markets had priced in.
The single currency hit a four-week high of $1.0894 after the announcement, up over 2 percent on the day, while euro zone stocks shed 2 percent as they headed for their biggest daily drop since September.
Ten-year euro zone government bond yields rose 10-20 basis points, with Italy’s near a one-month high after a 28 bps rise to 1.66%. Money market rates rose.
Stephan Rieke, senior economist at German private bank BHF-Bank, said:
“The markets were very ambitious with respect to the measures the ECB would possibly take and are now disappointed.”
And here’s today’s euro/US dollar spike, from below $1.06 to over $1.08.
Updated
Money continues to pour into the euro, sending the single currency to a one-month high against the US dollar.
The euro has gained almost two and a half cents, which is its biggest one-day move since March this year.
Updated
Reto Foellmi, Professor of International Economics at the University of St Gallen in Switzertland, isn’t impressed by the cut in bank deposit rates.
He argues it will not encourage banks to lend more:
“I doubt the success of lowering already negative interest rates in the Eurozone.
Negative interest rates typically increase the associated hedging costs for banks. Tighter bank regulation has reduced bank’s risk appetite. Both effects work against higher lending rates for the private sector. So, this is not really a stimulus for the economy”.
Updated
Sorry, I’m a bit late with this, but Mario Draghi’s statement is online here:
Introductory statement to the press conference
It outlines the various stimulus measures taken today, the new staff forecasts (growth up a bit, inflation down a bit), and the ECB’s concerns about “subdued growth prospects in emerging markets and moderate global trade”.
As usual, Draghi also urges elected politicians to reform their economies faster.
Greek finance minister denies secretly encouraging strikes
The Greek finance minister Euclid Tsakalotos in an interview with the Guardian has rubbished the idea that Athens’ left-wing government is all for unions staging general strikes – as a budget saving measure.
The Greek finance minister was speaking as the country was hit by another 24-hour walkout. He firmly quashed media reports that Athens’ Syriza-led coalition is secretly supportive of unions walking off the job.
In an exclusive interview Tsakalotos labelled the very notion that the government might see such action as a cost-cutting measure as vaguely absurd.
“I don’t think that has passed anybody’s mind, it certainly hasn’t passed the minister of finance’s mind”.
But the Oxford educated economist added that - as a leftist - he was not unsympathetic to popular protests even if, he said, they were not always constructive.
“I am not unsympathetic to any social movement because I am a left-wing person and think their independence is absolutely critical to the character of social and economic life.
I don’t think a left-wing government can actually function without social movements that pressurize it and act as a counter balance to other political forces.”
Greek unions, who are considering calling another general strike before Christmas, estimated that today’s protest rally drew a crowd of not more than 40,000. “It was smaller than we expected,” Odysseus Trivalas, who heads the civil servants’ union ADEDY said of the turn-out.
“We think it is partly because it was organised in such short time and that people are clearly tired … but the government should know that these policies cannot continue. We will be taking to the streets again.”
UK factory bosses should put Mario Draghi on their Christmas card list.
Sterling has dropped by two euro cents against the euro today, making UK exports more competitive.
Simon French of stockbrokers Panmure Gordon says:
This is good news for the UK manufacturing sector who have been struggling against a weak Euro that is damaging competitiveness.
You could argue that the financial markets are the ones who messed up, not the European Central Bank.
As Stewart Robertson, senior economist at Aviva Investors points out, the ECB has taken several new steps to help the euro economy today. Investors just expected even more.
The only area it didn’t really deliver on today was the amount of monthly purchases [via QE]. It has cut the deposit rate, expanded the range of instruments it can buy and extended the possible end date by six months from September 2016 to March 2017.
If it had said nothing (in October) and delivered this today, the market reaction would have been very different. And after all, the Euro is still much lower today than it was before Draghi’s “pre-announcement” in October.
My colleague Heather Stewart has written a new story on how Draghi disappointed the markets. Here’s a flavour:
Mario Draghi, the president of the European Central Bank, has dashed investors’ hopes of a significant expansion of its quantitative easing programme to boost the flagging eurozone economy.
The euro jumped on foreign exchanges during Draghi’s press conference in Frankfurt, as he said the ECB had decided to cut the deposit rate on bank reserves, and extend QE by six months – but would not step up the pace of bond buying.
The ECB said it would cut the deposit rate on reserves held at the central bank to -0.3%, from -0.2%. At the subsequent press conference on Thursday, Draghi said the ECB would extend its quantitative easing programme – aimed at boosting inflation and bolstering growth – by six months, to March 2017.
But the 0.1 percentage point cut in the deposit rate was smaller than investors expected, and the pace of bond buying will remain at €60bn a month, which could suggest more sceptical members of the ECB’s governing council, such as Bundesbank president Jens Weidmann, blocked a more aggressive cut.....
Here’s the full story:
Alberto Gallo, head of global macro credit research at RBS, has an unconventional take on today’s events:
QE1 is first love. QE2 is like getting back with your ex girlfriend.
— Alberto Gallo (@macrocredit) December 3, 2015
Snap Summary: Draghi under-delivers
Here’s a quick summary of the main points, and an early stab at some analysis.
The European Central Bank has cut the interest rate which eurozone banks pay on their deposits at the ECB. It has been slashed deeper into negative territory, but not by as much as expected.
The deposit facility rate has been lowered to minus 0.3%, not the minus 0.4% which some economists had forecast. This makes it even less attractive to leave cash lying around at the ECB, rather than lending it to consumers and businesses across the eurozone.
The ECB has made three changes to its quantitative easing programme, which injects new money into the system by buying assets from banks
-
It will be extended, by six months to March 2017.
- As bonds bought under QE mature and are paid back, the ECB will reinvest the proceeds in new debt. That means it is promising to provide extra liquidity for longer than before.
- It has extended the range of assets which can be mopped up -- to cover debt sold by regional governments.
But the ECB has not raised the pace of QE - it will continue to buy €60bn of assets, dashing hopes that it would crank up the printing presses.
Especially as the ECB has lowered its inflation forecasts, admitting that prices will remain subdued for even longer.
Investors are giving Draghi the thumbs-down - driving the euro up by 2% against the US dollar to $1.08.
Citi experiences extraordinary levels of market volume following #ECB decision. EURUSD 500% to 600% higher as normal pic.twitter.com/H40a3BKp3t
— Holger Zschaepitz (@Schuldensuehner) December 3, 2015
Stock markets have plunged sharply, with Germany’s DAX shedding 3% at one stage.
Why? Because Draghi and colleagues had dropped so many hints that they would act decisively today.
As Capital Economics put it - investors will reach for the salt bucket the next time Draghi opens his mouth.
So what went wrong?
Draghi admits that today’s decisions were not unanimous. That suggests that hawks on the governing council dug their claws in, and refused to allow more decisive action.
But they may have a point. As Draghi pointed out - the eurozone economy is growing, credit conditions are improving. QE is working, and they’ll keep doing it. Why bring out a bigger punchbowl?
And he also left one weapon in his knapsack; by repeatedly ducking questions on whether interest rates are now at the ‘lower bound’ (the point where they cannot be cut again). Draghi isn’t ruling out further action in the months ahead.
Finally, he has also delivered an early Christmas present to Fed chair Janet Yellen. By easing policy by less than expected, the ECB has given the US central bank more leeway to tighten US monetary conditions. An American rate hike in two weeks time looks even more likely now.
Updated
Press conference over, summary to follow....
Finally, a question about the euro, which has bounced away from near-parity against the US dollar today. Does the ECB have concerns about the exchange rate?
Draghi sticks to the standard answer - that the exchange rate is not a policy target, but it’s an important factor in monetary policy, and the ability of the ECB to transmit its measures to the real economy.
Draghi: "the exchange rate is not a policy target". Some fun, at last.
— Frederik Ducrozet (@fwred) December 3, 2015
Draghi admits that we don't know what the economic impacts of the refugee crisis and terrorist threat are.
— Megan Greene (@economistmeg) December 3, 2015
Q: What impact will the Paris terrorist attacks have on the eurozone economy?
Short answer, we don’t know, Draghi replies. The future is full of geopolitical risks.
That’s why “there is confidence, but there is no complacency” at the ECB.
Draghi: In the measures we announced today there is confidence but there is no complacency
— ECB (@ecb) December 3, 2015
Updated
Mario Draghi appears to have over-promised and under-delivered, says Ben Brettell, Senior Economist at Hargreaves Lansdown.
Brettell sums up the gloomy mood:
Markets expected Draghi to deliver a combination of rate cuts and tweaks to the ECB’s QE programme. The deposit rate for commercial banks was already in negative territory at -0.2% and analysts had predicted a cut of between 0.1 and 0.2 percentage points. The cut to -0.3% therefore left markets somewhat underwhelmed. The other two key interest rates were left unchanged.
Far more exciting for the markets were the expected tweaks to QE in the subsequent press conference. The current programme of €60 billion of asset purchases per month has been extended by six months, to March 2017 (or beyond if necessary). ECB has also expanded the range of assets being purchased, to include regional and local government debt.
However, this does little to provide an immediate boost to the economy. Markets had been hoping for an acceleration of QE, i.e. an increase to the €60 billion monthly figure. The disappointment in financial markets is palpable this afternoon. The euro has strengthened (which won’t help the euro zone economy) and stock markets have fallen on the announcements.
Mario Draghi is repeatedly denying that the European Central Bank is indulging in ‘monetary stimulus’ through its QE scheme.
Some journalists are concerned that the ECB might break its mandate by taking government debt onto its balance sheet.
They fear that this means some eurozone countries (perhaps Germany, to take a completely random example) might end up paying off the debts of others.
Draghi is adamant that this isn’t happening.
#Draghi "I would exclude any form of monetary financing" Ah but for how long Mario? #ECB #QE
— Shaun Richards (@notayesmansecon) December 3, 2015
Updated
Pensioners should be worried by the ECB’s decision to take more stimulus measures today, argues Charles Cowling, director at JLT Employee Benefits:
“The ECB’s extension of its QE programme is not a surprise, given the continued weakness in the Eurozone economy and the lack of inflationary pressure. However, this is bad news for pension schemes as it suggests the ECB feels interest rates may stay very low for longer than expected.
Our research, launched in October, suggested that a delay of 12 months in interest rates rising could see total UK pension scheme deficits balloon by £62bn.
Draghi is insisting that today’s decision to roll-over QE bonds, to buy new ones when old ones mature, is a big step.
#Draghi underlines AGAIN that bond principal re-investments will "surely" continue after March '17. He is struggling to convey the message.
— Maxime Sbaihi (@MxSba) December 3, 2015
Another development - the ECB will no longer discuss monetary policy with City institutions in the run-up to major announcements.
Draghi: During the quiet period there will be no discussion on monetary policy with representative of financial institutions
— ECB (@ecb) December 3, 2015
This follows concerns over contact between ECB officials and hedge funds and the like -- on one occasion, a speech was not released to the public until many hours later.
Updated
Draghi has insisted that the ECB will not run out of assets to buy through its QE programme.
Bonds are there to be bought, he declares.
ECB has 'failed to meet its own hype'
Jonathan Loynes of Capital Economics says the ECB’s limited new stimulus measures are a serious disappointment.
Draghi’s reputation could suffer, he adds:
This will be seen as a clear disappointment in the light of the repeated extremely dovish signals from the President and his colleagues.
That is clearly evident in the reaction of the euro, which has unwound the falls of the last month in response to the announcements, and the jump in bond yields. In short, the ECB has comprehensively failed to live up to its own hype and markets and forecasters will take future communications from Mr Draghi and colleagues with a corresponding bucket of salt.
Markets tumble as Draghi disappoints
European stock markets are in retreat, plunging sharply as investors rapidly digest the news out of Frankfurt.
Germany’s DAX is leading the selloff, shedding more than 3%. France’s CAC is down 2.8%.
Traders are reacting to the jump in the euro, which is still up over 2% after the ECB launched less stimulus than expected. A strong euro is bad for eurozone exports.
The selloff is because:
- Analysts had expected a deeper cut on the ECB’s deposit facility rate, to minus 0.4%, so minus 0.3% is a blow.
- They also expected a boost to QE, from €60bn of bond purchases per month to perhaps €75bn. This simply hasn’t happened - and the six-month extension to QE is a poor substitute.
We’re not excluding the use of other instruments, if needed, Draghi says.
#Draghi: decisions made today were "not unanimous" but there was "a very large majority in favor of this package, very large" #ECB
— Maxime Sbaihi (@MxSba) December 3, 2015
ECB decision was not unanimous
Q: Did you make a mistake in your communication strategy, Mr Draghi, or did you overestimate your ability to persuade your colleagues to do more?
They were not unanimous, Draghi reveals, but there was a very large majority in favour.
He doesn’t reveal who dissented - but Germany’s central bank chief, Jens Weidmann, is an obvious candidate
We think the 10 basis point in the deposit facility rate is “adequate”, Draghi concludes.
Draghi: Our stimulus is working
Q: The financial markets are disappointed, so why didn’t you do more? Why didn’t you raise the pace of QE bond-buying above €60bn/month.
Mario Draghi says that the ECB analysed the situation.
It sees a continued recovery in the eurozone, driven by consumer spending - with growth either 0.3% or 0.4% in the last three quarters.
That is due to our accomodative monetary policy - and also due to cheaper oil.
We concluded that our policies have been effective, in improving credit conditions and financial market conditions, and in the real economy.
But the governing council concluded that more stimulus was needed.
Draghi spells it out:
Let me make this clear. We are doing more, because it works, not because it fails.
So we decided to ‘recalibrate’ our policies, Draghi concludes (by extending QE by another six months)
The re-investment of principle payments from bonds that mature is important, Draghi he insists. It means we are committed to maintain our liquidity position for longer than we’ve been saying before, for “a long long time”
Draghi is now urging eurozone governments to strive for “more growth-friendly” fiscal policies.
I’ll post Draghi’s full statement shortly. He’s about to take questions.
Updated
But the EC has cut its inflation forecasts even more -- inflation will be just 1.6% in 2017, well below the ECB’s target of almost 2%.
Draghi: Projections foresee annual HICP inflation at 0.1% in 2015 (0.1% in Sept), 1.0% in 2016 (1.1%) and 1.6% in 2017 (1.7%)
— ECB (@ecb) December 3, 2015
The ECB has slightly raised its growth forecasts:
- 2015 Growth now seen At 1.5%. up from 1.4%
- 2016 Growth Forecast Unchanged At 1.7%
- 2017 Growth now seen At 1.9%, up from 1.8%
Open Europe analyst Raoul Ruparel says Draghi has failed to meet expectations, by not beefing up the amount of money the ECB is printing each month:
#Draghi has disappointed as warned. No increase in headline size of asset purchases is biggest blow. Always thought this may be step too far
— Raoul Ruparel (@RaoulRuparel) December 3, 2015
Updated
Draghi sounds rather gloomy, warning that the risks to eurozone inflation are still on the downside (ie, there’s more chance that it is too weak)
Draghi: The latest staff projections indicate continued downside risks to the inflation outlook
— ECB (@ecb) December 3, 2015
Euro jumps above $1.08 as Draghi disappoints so far pic.twitter.com/jlF5c6Zubh
— Holger Zschaepitz (@Schuldensuehner) December 3, 2015
The euro has spiked higher, hitting $1.08 against the US dollar. That’s a gain of almost two cents.
That shows that today’s stimulus measures have not met market expectations (yet)
Updated
Draghi has NOT said anything about increased the pace of quantitative easing.
That suggests it will remain at €60bn per month - dashing hopes that the ECB would speed up its bond-buying purchase programme.
Draghi also said the ECB has decided to reinvest the proceeds from QE as bonds mature.
Draghi: Third, we decided to reinvest the principal payments on the securities purchased under the APP as they mature, as long as necessary
— ECB (@ecb) December 3, 2015
That’s not a big shock - it just means the QE programme will not shrink as bonds bought by the ECB are repaid by the borrowers.
#Draghi: Regional & local government debt now eligible for QE purchases. Wider scope.
— Maxime Sbaihi (@MxSba) December 3, 2015
Another important development: the ECB has extended the range of assets that are eligible for QE. It will now also buy regional and local government debt.
ECB extends bond-buying until March 2017
The ECB has extended its QE programme!
Draghi explains that the governing council decided that the current programme should run until until the end of March 2017, or beyond if necessary.
That’s an extra six months of QE.
Updated
Draghi begins by saying the ECB governing council held a ‘thorough’ examination of the reasons why inflation is far below the ECB’s target of nearly 2%.
As a result, we took the following decisions:
We decided to lower the deposit facility rate by 10 basis points to minus 0.3%, but left the other key rates unchanged (as we knew already).
Mario Draghi has arrived at the press conference in Frankfurt for today’s press conference.
The ECB chief looks calm and relaxed, smiling at the press photographers as they jostle for a good picture.
Watch the press conference here:
Mario Draghi’s press conference will be streamed live, here (right-click to open in a new browser).
I’ll cover the key points, and instant reaction, in this blog.
Enrique Diaz Alvarez, chief risk officer and currency expert at financial services group Ebury, predicts more fireworks from Mario Draghi in a few minutes:
He says:
“Today’s decision is expected to result in significant further easing by the ECB.
Sustained low inflation in the Eurozone combined with a disappointing economic performance mean that Mario Draghi is likely to carry a comfortable majority of the Governing Council with him in his bid to pump further monetary stimulus.
Now that things have calmed down, it appears that the markets are underwhelmed by these stimulus measures - or at least, what we’ve heard so far.
The euro has continued to strengthen since the ECB’s announcement - which shows that investors had priced in a deeper interest rate cut.
A lot of people were talking about a 20 basis point cut, to -0.4%, so today’s 10 basis point cut obviously falls short.
HOWEVER, we have not heard from ECB chief Mario Draghi yet.
The press conference is in 15 minutes -- that’s where any changes to QE will be explained.
No pressure, Mario....
Draghi needs either a big QE expansion or to talk very, very, very dovish to get the market back onside.
— Richard Barley (@RichardBarley1) December 3, 2015
ask yourself why #Draghi would talk up QE for weeks but only announce a modest rate cut? Much more to come at 1.30pm. #Euro
— Joshua Raymond (@Josh_RaymondUK) December 3, 2015
Financial pros on Twitter is offering the Pink ‘Un its support at this difficult time:
Let's be honest. We should really be thanking the FT for brightening up an otherwise boring day.
— The Dude (@IyerC) December 3, 2015
That was fun. :) Thanks @FT https://t.co/rhwCFRiOje
— Ipek Ozkardeskaya (@IpekOzkardeskay) December 3, 2015
Up to a point anyway....
#ECB that not quite the rabbit we were looking for
— Neil Wilson (@neil_axonomics) December 3, 2015
Ignore those losses. No biggie. https://t.co/ghARFy0gFT
— Lady FOHF (@LadyFOHF) December 3, 2015
The ECB has taken fresh stimulus measures because it is worried that the eurozone is falling back into deflation, says David Katimbo-Mugwanya, fixed interest fund manager at EdenTree Investment Management.
The desire to boost inflation in Europe is likely to have galvanised its decision to cut the deposit facility rate from -0.20%.
Data this week showed that inflation was just 0.1% last month, way below the target of almost 2%.
It’s important to note that negative interest rates are only being imposed on eurozone banks, NOT consumers or businesses.
That’s because the European Central Bank has three separate interest rates, and it has only cut one of them - the deposit facility rate, which banks pay on deposits left at the ECB.
By cutting the deposit rate from -0.2% to -0.3%, the ECB is effectively charging banks a larger penalty for not lending to the real economy.
The ‘main refinancing rate’ -- the headline cost of borrowing, basically - is stuck at it record low of 0.05%.
The third rate is the ‘marginal lending facility’ - charged on banks when they borrow from the ECB. That remains at 0.3%.
Monetary policy decisions: deposit facility rate cut to -0.30% (minus 0.30%), MRO rate and MLF rate unchanged https://t.co/Dndob8fdEl
— ECB (@ecb) December 3, 2015
Updated
Never wrong for long...
Correction: please ignore earlier tweet headlined "ECB leaves rates unchanged in shock decision". This was published in error.
— Financial Times (@FinancialTimes) December 3, 2015
ECB to announce further policy measures
The ECB has also dropped a big hint that it is expanding its quantitative easing programme.
It says it will announce “further policy measures” at Mario Draghi’s press conference, in 20 minutes.
***ECB says to announce further policy measures at news conference
— Fabrizio Goria (@FGoria) December 3, 2015
That strongly suggests the ECB will expand its bond-buying purchase scheme.
Perhaps it will start buying more than €60bn of assets per month, or perhaps it will extend it beyond the current cut-off point of September 2016. Or perhaps both.
ECB cuts deposit rate
BREAKING: The European Central Bank has announced new stimulus measures, in a fresh attempt to help the eurozone economy (and disproving that FT story that sent the euro surging)
The ECB has cut its deposit rate, as expected, but only by 10 basis points to minus 0.3%. That means banks will be charged even more to store cash at the ECB.
That’s a slight disappointment, as some investors had expected a 20 basis point cut to -0.4%.
Here’s the shock FT story that sent the euro spiralling:
Euro spikes
This is curious... the euro has just spiked against the US dollar.
This has been triggered by a report on the Financial Times that the ECB has left interest rates unchanged. It’s online here.
That’s odd as the announcement isn’t due for another minute....
The recent plunge in eurozone government bond yields into negative territory means that investors are effectively paying to hold short-term debt.
(that’s because if a bond yield is negative, the buyer has paid more than the face value of the bond).
It’s a remarkable thing, as analysts at Deutsche Bank point out:
“We stand on the brink of another extraordinary central bank policy easing today, from the ECB of course, which has been increasingly priced into markets, meaning amongst other things that you have to pay heavily indebted governments even more for the right to lend to them at the front end of the curve.”
(via Reuters)
The ECB has three goals today, says Stephen Macklow-Smith, Head of European Equities Strategy, J.P. Morgan Asset Management.
And they are:
- maintain Euro weakness,
- keep interest rates lower for longer
- boost liquidity with a view to stimulating credit:
He believes that the ECB’s existing stimulus measures are working (although inflation is just 0.1%, the economy is growing and inflation expectations are rising).
Cutting the deposit rate further would be a way of trying to force banks to lend more, but it is a blunt instrument. Extending the time period over which QE takes place is a possibility, as is expanding the scope of the purchases to include local government or corporate bonds.
There will no doubt be volatility in both FX and rates while the policy announcements are made – but the key way to judge the effectiveness of ECB policy is to look at what happens to asset prices in the next week or month.
The euro is continuing to fall; now down 0.65% today at $1.054 against the US dollar.
EURO LODing ahead of the ECB decision
— Joseph Weisenthal (@TheStalwart) December 3, 2015
(LOD = low of the day)
The waiting is nearly over..... in 45 minutes, the European Central Bank will announce its decisions.
Associated Press has a good preview, for anyone trying to get up to speed (I’ve added links to relevant parts of this liveblog):
Markets are waiting for the European Central Bank to announce Thursday that it will unleash another round of monetary stimulus for the eurozone’s shaky economy.
The ECB could cut the interest rate on deposits by commercial banks, effectively encouraging them to lend more rather than hoard it.
The rate is already minus 0.2%, and analysts say it could be cut by another 0.10 percentage point or more.
ECB President Mario Draghi could also announce it is extending its 60 billion euros ($64 billion) per month in bond purchases made with newly created money beyond September 2016, or increase the amount purchased every month, or both.
The bond purchases are a way of increasing the amount of money in the economy, which in theory can make credit cheaper and raise inflation.
Low inflation is the chief reason the ECB wants to take action. The current annual rate of 0.1 percent is well below the ECB’s goal of just under 2 percent.
Updated
Here’s a great chart showing how the prospect of more eurozone QE has driven eurozone government borrowing costs to record lows (below zero in some cases).
Waiting for Draghi and euro-area note yields are dropping to fresh record lows #ECB https://t.co/XPKjds2mlb pic.twitter.com/HXrIl0PRoX
— Lucy Meakin (@lucy_meakin) December 3, 2015
There are reports on Twitter of isolated clashes between some protesters and riot police in Athens, during the protest marches for today’s general strike (as explained earlier).
Molotov thrown at greek ministry of finance in #Athens RT @dromografos: Στο ΥΠΟΙΚ νωρίτερα pic.twitter.com/qQ6bheHVFe
— Janine Louloudi (@janinel83) December 3, 2015
Short tension in downtown #Athens when some protesters set garbage bins on fire #Greece #strike
— Keep Talking Greece (@keeptalkingGR) December 3, 2015
Clashes between protesters and riot-police in Athens general strike demo. pic by @SocialRevoluti1 #3dgr #apergia pic.twitter.com/HYpVny3MDB
— spyros gkelis (@northaura) December 3, 2015
The Commission has also produced an infographic explaining why it’s investigating McDonald’s tax affairs....
EC launches probe into McDonald's tax deal
Breaking news from Brussels.... the European Commission has just announced it has begun a formal probe into fast food giant McDonald’s and its ‘sweetheart’ tax deal with Luxembourg.
Commissioner Margrethe Vestager says the EC will investigate how McDonald’s deal with Luxembourg’s tax office meant it paid no corporate tax in Luxembourg, despite recording large profits.
Vestager says:
“A tax ruling that agrees to McDonald’s paying no tax on their European royalties either in Luxembourg or in the US has to be looked at very carefully under EU state aid rules. The purpose of Double Taxation treaties between countries is to avoid double taxation – not to justify double non-taxation.”
Commission opens formal investigation into Luxembourg's tax treatment of #McDonald's : https://t.co/x5mQmoJghb
— Elodie Lamer (@ElodieLamer) December 3, 2015
And here’s our earlier story, explaining how some multinationals have secured controversial tax deals with the Lux authorities:
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Just two hours to go until the ECB publishes its decisions on interest rates.
The yields, or interest rates, on shorter-dated eurozone government debt are hitting new lows this morning as investors buy them ahead of today’s ECB decision.
This has driven Italian two-year bonds deeper into negative yields - meaning investors are effectively taking a loss on them.
However, they could still bank on selling them to the ECB - as it will buy anything yielding more than its deposit rate (currently -0.2%).
2yr Italian bond yields go into negative territory (chart via @SoberLook) pic.twitter.com/CTE55Monys
— Megan Greene (@economistmeg) December 3, 2015
German government debt has been in negative territory for a while -- and two-year debt is now yielding a staggering -0.438%.
That suggests the market is pricing in a big cut to the deposit rate:
* German two-year bond yield hits record low at -0.438 percent ahead of ECB decision - Tradeweb
— Fabrizio Goria (@FGoria) December 3, 2015
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Tin hats on - we're entering two crucial weeks
Today’s ECB meeting is the first act in a dramatic fortnight for the global economy.
While Mario Draghi will probably ease monetary policy today, his US counterpart -- Fed chair Janet Yellen -- may well announce an interest rate rise on December 16th.
The Economist Intelligence Unit’s Robin Bew reckons it’s a crucial time:
Most important 2 weeks in monetary policy for years. #ECB set to up its #QE game today, and by mid-December Fed will have raised rates.
— Robin Bew (@RobinBew) December 3, 2015
And our own economics editor, Larry Elliott, warns that the divergence between the US and the eurozone could create a rocky time in the markets:
Some analysts believe the sharply different strategies being pursued by the ECB and the Fed threaten a period of global financial turbulence.
David Marsh and Ben Robinson of the Official Monetary and Financial Institutions Forum thinktank said: “The great monetary polarisation between the US and Europe is under way. After a period of close alignment since the collapse of Lehman Brothers in September 2008, US and European monetary policies are about to diverge in dramatic fashion.
“The message from 70 years of monetary history is that, in the next few months, there is a roughly 50% chance of large-scale foreign exchange upheaval,” they said.
More here:
On General Strike, GSEE union says government broke commitments, policies causing "poverty and misery" #Greece pic.twitter.com/hY0dBOJEyX
— Derek Gatopoulos (@dgatopoulos) December 3, 2015
General strike in Greece
Today’s 24-hour general strike has also hit services in Athens and beyond.
Transport links are closed, hospitals are operating with a skeleton staff, and the banks are shut too (a familiar feeling for Greeks this year...)
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Over in Greece, anti-austerity rallies are underway as unions protest against the pension reforms being implemented as part of the third Greek bailout.
General strike in #greece today. Ongoing demo. RT @Hibai_ Huelga general en #Grecia. pic.twitter.com/s4XLMEn2sx
— spyros gkelis (@northaura) December 3, 2015
From Athens, Helena Smith reports:
Protest rallies have begun as workers mark today’s general strike.
Unionists say they hope to get as many as 100,000 people onto the streets in a mass display of opposition against the austerity policies prime minister Alexis Tsipras’ government is pursuing.
This is the second general strike in the space of two weeks and is aimed, squarely, at sending the leftist-led administration a message: that “enough is enough” with austerity.
“We are hoping to get a huge crowd onto the streets and to send this government and the troika [foreign lenders] a very clear message that ordinary working Greeks have had enough,” Odysseus Trivalas, president of the civil servants union ADEDY told me.
“Some of us have lost 50 percent of our salaries and the recession is only set to get worst with this latest agreement [third bailout accord]. Austerity doesn’t work, growth, development, economic recovery will never happen if such policies are pursued.”
Here’s a photo of the communist union, PAME, marching in Athens this morning:
UK service sector growth hits four-month high
Markit also reports that Britain’s service sector grew at its fastest rate since July.
That suggests the UK economy will expand by 0.6% in the last three months of the year it adds, up from 0.5% in the third quarter.
Stronger services PMI for Nov puts UK on course for +0.6% GDP in Q4, assuming no surprises in Dec pic.twitter.com/Duk5WgRvjA
— Chris Williamson (@WilliamsonChris) December 3, 2015
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The latest healthcheck of Europe’s private sector paints a mixed pace.
The Good News is that European companies are growing at a faster pace, with expansion hitting a four month high in November.
Markit’s composite PMI - which tracks activity across the manufacturing and services industry - has risen to 54.2, from 53.9. That means growth accelerated across the eurozone.
The Less-good News, though, is that the prices charged by these companies fell for the second month running. That’s great for consumers, but it also indicates that deflationary pressures are building - which might spur the ECB on to act.
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What happens if Draghi forgets to bring the rabbit?
Ilya Spivak, currency strategist at DailyFX, says the euro would spike if the ECB fails to meet those market expectations:
“The markets seem primed for a big-splash accommodative gesture, raising the bar on the ECB to deliver a dovish-enough result to mollify investors and increasing the threat of disappointment. If traders are left unimpressed, the Euro is likely to rise amid profit-taking on short positions while broad-based risk appetite deteriorates, weighing on sentiment-linked FX including the Australian and New Zealand Dollars.”
And while the ECB wouldn’t ever admit it was weakening the euro, it wouldn’t be pleased to see the currency strengthen (as this would be deflationary)
Kit Juckes, currency strategist at Société Générale, believes Draghi could drive the euro lower today by announcing significant new stimulus measures:
Everyone expects Mario Draghi to arrive with a hat and crucially, to produce a rabbit from it.
We expect a 10bp cut in the ECB’s Deposit Rate to -0.3% at today’s meeting, more asset purchases (an increase of €10-20bn per month to €70-80bn, including a shift to widen the universe of bonds bought) and the reference to continuing purchases until September 2016 may (should) be dropped.
A two-tier deposit rate to reduce the cost to banks is possible, as well. Will this be enough to move the Euro given the way expectations have been ramped up? Our best guess is that Mr Draghi will send a sufficiently dovish and committed message to the market that the Euro will remain under pressure, though two-way volatility can pick up.
New French unemployment figures have highlighted that parts of the eurozone economy are still fragile.
France’s jobless rate jumped to 10.6% in the three months through September, up from 10.4% in the April-June quarter.
That means France - the eurozone’s second-largest economy - now has a higher unemployment rate than the region’s average:
French unemployment today at highest in nearly 2 decades - Above EZ, first time in 8yrs https://t.co/uQqGYVNm4d pic.twitter.com/iPeSGsC1Qe
— Mike Bird (@Birdyword) December 3, 2015
It’s a reminder that monetary policy can only do so much - a point Draghi makes at every opportunity, when he urges governments to make structural reforms post haste.
Markets rise ahead of ECB decision
European stock markets have risen in early trading, suggesting investors are confident that Mario Draghi will deliver something significant today:
Mike van Dulken of Accendo Markets says traders want to see three things from the European Central Bank today.
Markets hope that President Super Mario Draghi delivers a hat-trick of stimulus measures to foster inflation and growth, both expanding and extending the current QE programme and taking deposit rates further into negative territory.
ECB Day: What the analysts expect
Predictions are flooding in.
Capital Economics are confident Draghi will deliver. They forecasting that QE will be bumped up to €80bn per month, from €60bn, and that the deposit rate is cut from -0.2% to -0.4%.
A massive day for the #ECB. We expect a €20bn rise in monthly QE & a 20bp cut in depo rate. Anything less could halt or reverse fall in €.
— Capital Economics (@CapEconEurope) December 3, 2015
French bank BNP Paribas expects a smaller boost to QE - just €10bn more per month, but with the ECB also extending the programme by 12 months.
BNP expects #ECB to cut deposit rate by 20bps to -40bp, a €10bn increase in monthly pace of QE, and an QE extension by a year to Sep2017.
— Holger Zschaepitz (@Schuldensuehner) December 3, 2015
Economist Fred Ducrozet flags up that Draghi could change the ‘yield threshold’ of QE.
Currently, the ECB can’t buy some safe-haven government bonds that are trading significantly above their face value - changing the yield threshold would make them eligible for the QE programme.
ECB D-day! Baseline: 10bp cut + 6-12m QE extension Key points: More cuts or not 2-tiered depo or not QE yield threshold QE modalities
— Frederik Ducrozet (@fwred) December 3, 2015
While Marc Ostwald of ADM Investor Services flags up that the ECB could make its quantitative easing programme open-ended:
There is much speculation that the ECB may simply drop the reference to September 2016 in favour of ‘as long as it takes to’ confirm that CPI is headed back to target.
This would hardly be a dramatic change, as this is already implied in the current formulation. Markets would probably welcome this as it can be interpreted as a form of “QE infinity”, though in truth it is a double edged sword, as the QE programme could be halted sooner than expected.
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Can Draghi handle the challenge of saving the eurozone from a deflationary slump? You betcha.
Here’s his favourite joke, via Business Insider:
A man needs a heart transplant. Says the doctor: “I can give you the heart of a five-year old boy.”
“Too young.”
“How about that of a forty-year old investment banker?”
“They don’t have a heart.”
“A seventy-five year old central banker?” “I’ll take it.”
“But why?” “It’s never been used!”
The point being that big monetary policy decisions come from the head. If it’s the right thing to do, just do it.
You doubt Draghi will handle the pressure? His fav joke: “I'd take a heart transplant from a 75y old central banker. It’s never been used!”
— Frederik Ducrozet (@fwred) December 3, 2015
Mind you, I bet Draghi’s heart went bumpity-bump when protester Jo Witt disrupted April’s press conference:
Remarkable scenes at today's ECB press conference: http://t.co/XB6i3QSCd4 pic.twitter.com/sCy08at1bq
— Graeme Wearden (@graemewearden) April 15, 2015
This chart from ABN Amro shows that Draghi would have to announce quite a lot today to actually surprise the markets.
More QE and deeper negative interest rates for commercial banks are already priced in.
It's #ECB day! Please find our table and note on various scenarios and market reaction below https://t.co/7mwampZH4r pic.twitter.com/GdgNC0YQRX
— Nick Kounis (@nickkounis) December 3, 2015
Draghi's options
The ECB governing council have several weapons in their armory today:
Extending quantitative easing for longer. The bond-buying programme is currently due to expire in September 2016, but the ECB could extend it by several months - or even indefinitely.
Boost the QE firepower. The ECB is currently buying €60bn of assets each month, but could decide to mop up more.
Cut the deposit rate deeper into negative territory. The deposit rate is already -0.2%, meaning banks are charged to leave money at the ECB. Draghi could lop off another 10 basis points, to -0.3%.
New forward guidance. Draghi is unparalleled in his ability to “jawbone” the markets - his ‘whatever it takes’ speech of July 2012 which helped save the euro will go down in monetary policy history. So he could hint at future rate cuts, or other stimulus moves, in the future.
My colleague Heather Stewart has analysed them in more detail here:
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You have to go back nearly a year to the last *really important* European Central Bank meeting.
To January 22, in fact, when Draghi announced that the ECB would launch a QE programme to fend off the threat of deflation.
This is the most important day for euro-area monetary policy since January 22nd. I hope #Draghi slept well. #ECB
— Maxime Sbaihi (@MxSba) December 3, 2015
Investors are already selling the euro, in anticipation of fresh stimulus measures today.
The single currency has dropped by around 0.25% to $1.058, close to a seven-month low.
How low can you go...? Euro down ahead @ecb meeting &stimulus bets. But big shorts mean disappointment could =spike pic.twitter.com/uGxXl2YO11
— Caroline Hyde (@CarolineHydeTV) December 3, 2015
Introduction: IT'S ECB DAY
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s Mario Draghi’s big moment, again.
The European Central Bank’s governing council is meeting in Frankfurt to set monetary policy, and we’re all expecting a new dose of stimulus measures.
With inflation at just 0.1%, unemployment still over 10% and bank lending disappointing, Draghi has plenty of excuses to ease monetary policy further.
Economists expect the ECB to extend its quantitative easing programme; it could commit to buy more government bonds each month, or run the programme for longer.
It is also expected to hit banks with sharper negative interest rates; that would encourage them to stop leaving money in the ECB’s vaults.
The interest rate decision comes at 12.45pm GMT (1.45pm Frankfurt time), followed by Mario Draghi’s press conference 45 minutes later.
There is a danger that the markets could be disappointed by the ECB’s news, simply because investors are united in expecting new stimulus measures. More easing is ‘priced in’, in City jargon.
But Draghi rarely lets us down, so he could well unleash some fireworks in his press conference.
Also coming up today.....
- Unions in Greece have called a general strike, to protest against the government’s pension cuts.
- New surveys of Europe’s service sector are released this morning by Markit.
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The European commission is to open a state aid investigation into suspected sweetheart tax arrangements enjoyed by McDonald’s in Luxembourg.
- And Janet Yellen, head of the Federal Reserve, is testifying to the Joint Economic Committee of the US congress, from 3pm GMT.
I’ll be covering all the events through the day...
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