After the FED Taper Tantrum we have the ECB Transparency Tantrum
Uncertainty about the future is something common in the financial markets, but until last week, we haven’t seen such a confusion and such a hard reaction of the international markets to Mario Draghi’s speech. The markets were highly disappointed from the last ECB decision to not further expand the QE. The expectations were for at least an increase of 10 billion euro of asset purchases per month. The latest inflation data in the euro-zone had pushed the market to consider sure, at more than 90%, a further expansion of the asset buying process by the ECB. It seems that Mario Draghi lost its ability to surprise the markets in terms of monetary easing. Given the huge plunge in the stock and bond markets within a few hours after the publication of the ECB decision and the largest appreciation of the Euro, in one day since 2009, we consider this volatility as an important change of the market’s perception of the ECB communication policy.
The Euro raised almost 3% against the dollar, the yen and the other major currencies after the ECB communication. Such a surge, in the price of these pairs, is considered impressive and it can only be a result of something highly unexpected by the markets. The reaction in the bond markets was also huge. The BUND, the ten years German’s government bond, had an aggressive reaction, the yields jumped by 20 basis points, the largest since 2009, from 0.41% to around 0.6%. All the European bond markets were under huge pressure and the same happened to the European stock markets. The DAX, the CAC, the MIB and many other major European indexes plunged for more than 3% within the day. Overseas was almost the same story, the American markets reacted also brutally to the ECB decision. The DOW went down for more than 300 points and the Asian markets couldn’t do otherwise.
As the market price on future events, the euro has been falling all the week before the ECB decision, reaching a record low level at around 1.05 against the US dollar. Moreover, in his last decisions, Mr. Draghi had always surprised the markets in terms of monetary easing, over-passing the German resistances, to stop easing the monetary policy in the euro-zone. Nobody was giving any more credibility the Mr. Jens Weidmann’s declarations. But next time, we guess, the market will restart to listen to him carefully, as it had always done.
Mr. Draghi now has a big problem with the credibility of his next declarations. The Fed’s Tapering of the last year was something the market has hardly chewed and lately the indecision on when the FED will raise rates is adding more confusion to long term investors. Now, that the ECB is having some problems in its communication’s transparency, investors could have also problems in their decision making and risk taking process. After the Taper Tantrum of last year in the US, we don’t need a Transparency Tantrum in Europe. Most likely, the difficulty of the next decisions in the board of the ECB’s council, will depend on the volatility of the upcoming inflation data. However, it would be appropriate for the ECB to not create expectations that can’t be put into action.