Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Draghi Leaves Financial Markets Hungry For More QE

Stock-Markets / Financial Markets 2015 Dec 08, 2015 - 12:23 PM GMT

By: Sam_Kirtley

Stock-Markets

The most significant event for the markets last week was Draghi disappointing markets that were eager for an increase in ECB QE. Instead, the ECB President cut the deposit rate by 10 basis points to -0.30% and extended the current easing measures to March 2017, and beyond if necessary. Markets saw this action as insufficient with expectations across the board being that the ECB would sizeably increase their current easing measures, rather than just extend them. This was shown be clear declines in both stocks and bond prices, as well as a significant rally in the Euro.


Whatever It Takes

This is the key reason why the markets reacted so viciously to the lack of an increase in monetary easing by the ECB. In July 2012 Draghi famously made the “whatever it takes” comment regarding the preservation of the Euro. Since then markets have interpreted the remark to mean that the ECB will not disappoint on matters of monetary policy, that is, that they will act as expected. However, this interpretation should be used more carefully as it is easy to confuse “whatever it takes” with “whatever the markets want” when considering the ECB’s actions, which it appears markets have now done.

The comment was originally made in the context of stopping a breakup of the Eurozone during the midst of multiple debt crises that threatened to end the Euro. However at present, we are not on the verge of a crisis. While economic data, particularly regarding inflation, is poor in the Eurozone, it is not nearly as severe as situation faced when Draghi originally made the comment. Therefore, the response from the ECB was always likely to be more measured than “whatever the market wanted”.

Furthermore, the market had reached an almost excited state about a massive increase in ECB QE. Expectations had begun around the deposit rate cut that was actioned, but as this was priced in markets anticipated that further measures would be required. The consensus became that an extension to the current QE program would be put in place. Then some began to speculate that an increase in QE would be made, which in turn became widely expected. In short, the markets got ahead of themselves.

Draghi is prepared to do “whatever it takes” to ensure that the Eurozone does not break up, but given that we currently are far from that situation we cannot expect the ECB to act as if we are on the verge of a crisis. The action taken was that which the ECB deems as being required, which was not, and will not necessarily ever be, what speculators want.

Draghi Is Not A Day Trader

Taking a step back, we will consider the action that was taken: a deposit rate cut and an extension of the current QE. This is still a strong response and a further increase in the highly accommodative stance of the ECB. The sky high expectations of investors were not met and the market has responded negatively to this, but the reality is that the action taken will very likely be sufficient for the ECB’s goals to be met.

The mandate of the ECB is not to satisfy market expectations. If central banks simply looked to take whatever action the markets had priced in they would effectively be making policy on public opinion, which would likely have dire consequences. Instead the ECB’s goals are price stability, full employment and balanced growth. This means that Draghi must look to the longer term.

Although day to day market reaction and confidence in policy making is important, the medium and long term response is far more so. As the ECB targets economic health, if the action taken last week sees this health improve, then markets will respond positively to that economic data. This reaction to economic data is the effective medium and long term response to last week’s announcement. Therefore, it is the actual effect on the economy that the market will react to in the long term, which also the target of Draghi’s latest measures. Accordingly, it makes sense that the ECB target longer term goals, as these are in fact far more important.

Conserving Ammunition

In our view the action taken last week is a tactical win for Draghi. Market expectations were too high, which means that a negative reaction would likely have been seen if anything short of a massive increase in QE was made. Given this and that the Draghi did not want to massively increase QE, the ECB had the option to take the minimum level of increase in their accommodative stance. This means that they still have a considerable amount of easing left to use when they believe it will be more effective.

This month we will see the Fed hike rates. This tightening of monetary policy could push the USD to make new 10 year highs, and over the longer term will further increase its strength. This will likely undo the 2.6% rally in the Euro seen on the day the most recent ECB meeting. As external factors are therefore likely to weaken the Euro, there is less need for the ECB to directly intervene and take action for the same effect.

Using an increase in QE in early 2016 would also likely have a greater impact. This will allow time for the effects of the rate cut and QE extension by the ECB, and the rate hike by the Fed to begin to flow through to the economy. During this time the markets will move past the initial negative reaction seen last week. If more QE is then required, the ECB can act as such. If it is not, then the ECB has not wasted valuable economic stimulus that was unnecessary.

Trading ECB Policy

The Fed hiking rates later this month is now all but guaranteed, which makes trading ECB policy more of a story for next year. We were long European equities in anticipation of more QE last week. However, we also sold topside protection on equities via out of the money call spreads when expectations became more extreme. We have since exited each of these positions for a profit.

From here we will look to establish trades based around the next significant ECB policy move. This is most likely to in early 2016 once the initial effects of the Fed rate hike have been felt. Therefore we will look to position our portfolio to take advantage of this through the rest of December and early next year before the action is fully priced in.

To take advantage of the ECB’s actions ahead of this, one must look to US markets and the Fed. The December Fed hike has been sealed by the strong payrolls print on Friday. This hawkish action will have a bearish effect on gold, causing it to continue to move lower over the long term. We have discussed in depth how fresh ECB QE would be bearish for gold, so the lack of it will likely have a bullish effect on the metal in the near term.

Therefore we will look to trade ECB policy by taking advantage of any near term rally in gold prices and shorting gold above $1125, before resistance at $1150 sets in. These short positions will appreciate as the ECB approaches the next big move, but will also gain value as gold falls towards $1030 on the Fed hike.

In addition to our trades on gold, we will also look to trade volatility. The highly accommodative stance of central banks had created the Global Central Bank Put that we have taken advantage of on multiple occasions. However, with the Fed tightening and the ECB taking a less accommodative stance than previously expected the effect of this put is decreased. This means that volatility has the potential to increase as the calming assurance that this put provides is diminished. Therefore the VIX is susceptible to a move higher outside of its current 15 to 20 range, which we will look to take advantage of.

We will signal our subscribers when we open these positions, providing them with the exact trades that we open in our own portfolio. We will also be publishing our regular market updates with further analysis of the future action for the ECB, the December FOMC meeting, and how we are trading gold, volatility, and other markets to our subscribers only. So for more information on how to become a subscriber, please subscribe via either of the buttons below.

Sam Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net
URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

Disclaimer:  www.gold-prices.biz   makes no guarantee or warranty on the accuracy or completeness of the data provided. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This letter represents our views and replicates trades that we are making but nothing more than that. Always consult your registered adviser to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this letter. Options contain a high level of risk that may result in the loss of part or all invested capital and therefore are suitable for experienced and professional investors and traders only. Past performance is neither a guide nor guarantee of future success.

Sam Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in