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The Good, The Bad, And The Petulant Child: Three "Morning After" Reactions To The ECB's...

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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 to continue treatment on problems that are increasingly beyond the scope of its abilities.




The litany of measures rolled out at yesterday’s meeting have great optics, increase the dose on some previous medicines, like bank subsidies, but at the end of the day can’t fix the ultimate malady




The problems in Europe, beyond the obvious things like a refugee catastrophe that isn’t being solved by dinner meetings in Brussels, are myriad and masked in their severity by aggregated numbers. Eurozone unemployment, only one example, doesn’t look so bad until you look at the dispersion of data points. By the time anything on the table pans out, a big if, you will have a generation of youth who have reached maturity never having held a job




Subsidizing a corporate bond market that is short of supply because borrowers don’t see a need for the proceeds, rather than lack of credit, benefits asset prices not the real economy. Sound familiar?




It will also further cloud price discovery and liquidity. The most immediate effect on jobs will be the shuttering of investment grade bond research departments.




They really do still believe that subsidizing banks to slide down the credit curve will somehow create entrepreneurial epiphanies or global demand for products. More likely a good portion of bank borrowing will go to backstopping existing non-performing loans. That’s okay, just call it what it is, so you will understand why the German press has been unimpressed




On a happier note, suppressing periphery sovereign spread differentials is an unambiguously good thing. It’s an enormous benefit to their national accounts and the best part of this package




The market reacted most to the notion that rate cuts might be over. In a world of negative rates, I take that as a good. But until fiscal policy is deployed, don’t think for a moment that more unusual monetary policies are off the table. Equities will take comfort and off we go again


And finally, here is Deutsche Bank's Jim reid who explains the ECB's action to a petulant child:


I suppose if I was trying to explain yesterday's ECB meeting to a child it might go something like this. 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?"


The truth: the ECB engaged in the latest act of desperate monetary intervention, one which may work and ultimately boost inflation expectations thereby stimulating the economy and leading to that holy grail for central bankers, credit demand, but if history is any precedent it won't, at which point the question will become: what other tricks does Draghi have left up his sleeve?














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