Weekend End Blog – The ECB delivers, slowing BRICS and Missing Volatility

The ECB monetary policy meeting yesterday was the financial event of the year, so far. As expected the ECB lowered interest rates, including an introduction of a negative deposit facility rate. In other words, you now get punished for stalling money at the ECB. But, far more important was that Draghi laid his cards on the table, showing he is indeed prepared to do whatever it takes. The ECB unveiled a new massive, EUR 400 billion, targeted lending program, suspended the sterilization of the Securities Markets Programme, its earlier bond buying effort, and will start to work on the purchase of asset backed securities . If that doesn’t prove to be enough, more will come. The word ‘Bazooka’ briefly came to mind.

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One would almost forget there was more interesting news coming from other places around the globe as well. The HSBC China Manufacturing PMI went up more than expected in May. Good news of course, but even despite this better than expected number, the PMI index did not manage to break above 50 for the fifth month in a row.

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China is not the only BRIC country that has difficulties keeping up growth. This week showed that Russia, at least partly because of Ukraine related sanctions, and Brazil, due to lower exports and investment, also experience slowing growth. The only exception seems to be India that looks set for a growth revival, helped by the strong election outcome.

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In the US, things are looking pretty steady. After a strong ISM manufacturing index, the ISM Non-manufacturing index came in better than expected. Both forward looking indicators are at healthy levels.

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A lot of talk about volatility this week. Suddenly, investors are getting a little bit anxious about the extreme low levels of volatility.

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But timing an increase in volatility is very difficult. And, anticipating a rise in volatility by buying VIX futures, means the odds are against you. A contango curved futures curve just eats your investment away. Unless you get the timing exactly right you are bound to lose money as the graph below shows.

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Finally, an interesting graph coming from the crypto currency world. I have seen more of these recently, showing that global reserve currencies have an average life expectancy of about 100 years. Since the US dollar is approaching this age as a reserve currency, the question arises which currency will take over. There are many contenders ranging from the euro, the yuan, to , yes, bitcoin. I don’t see an immediate shift coming up, but my guess is as good as yours.

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