Week End Blog – Draghi Delusion

It had to happen at some point. And last Thursday it became reality. Draghi disappointed markets by lowering the ECB deposit rate by ‘just’ 10 bps and by ‘only’ extending, and not increasing, the QE program. The result? The third biggest intraday move in the euro, a severe sell off in European equity markets and a 15 bps rise in the German 2-year bond yield. It’s the age of central bankers. For Goldman Sachs it was a particularly tough day, as they expected the euro to hit 1.03 against the U.S. dollar after Draghi’s speech.

In all honesty, the markets are more to blame for the sell off than Mr. Draghi is. German short-term bond yields indicated at least a 20 bps cut in the ECB deposit rate, even though the central bank lowered by just 10 bps on the last two occasions the deposit rate was lowered. That said, the fact that the decision was NOT anonymous also caused some jitters.

The chart below showed what happened in equity markets after the ECB decisions came in. That reminded us that the ‘whatever it takes’ phrase was never applicable to stock markets in the first place.

But ‘relax’, Draghi also kept the door wide open for even more stimulus if needed. The current deposit rate of -0.30% does not reflect the ultimate lower bound, and QE could be increased and/or prolonged again. Concerning the deposit rates, the chart below offers some guidance. Sweden’s deposit rate is currently -1.10%, so from this angle there is ample room to cut rates further.

To conclude the Draghi delusion, there was not just pain for investors, but for journalists as well. The Financial Times accidentally published a ‘prewritten’ post stating that the ECB did not change rates at all. Such an error is less harmless than one might think. With all the ECB anxiety in the market, the reaction to the untimely post was fierce, as the graph below shows. Perhaps a small blessing in the sky, they got the direction right.

Meanwhile, at the other side of the Atlantic, the latest job numbers indicate that a Fed rate hike in December is now pretty much a given. Nonfarm payrolls came in at 211K, again above expectations. DIVERGENCE rules!

While the ECB decisions caused a bumpy start of December, it’s still way too early to despair. Basically, December has got everything investors want. The highest average return, the lowest amount of risk, and the smallest average loss, are all characteristics that belong to December. Hence, if Yellen keeps it easy later this month, we could still experience a positive end of the year. More on December returns here.

For commodities this looks a bit more difficult to achieve. Especially now that OPEC refrained from lowering production. Hence, as for other commodities, the imbalance between supply and demand will linger for longer. Meanwhile the Bloomberg Commodity Price Index keeps hitting new lows.

I conclude the Week End Blog with investors’ latest gimmick. Remember the meteoric rise of Cisco, Intel Microsoft and Qualcomm in the second half of the 90s? Well, at J. Lyons Fund Management they constructed this chart comparing the so-called C.I.M.Q. stocks with the so-called F.A.N.G. stocks, Facebook, Amazon, Netflix and Google. If this chart is any guidance for what the future has in store for F.A.N.G., you might want to hold on to them a little while longer.

Thank you for reading the Week End Blog. Enjoy your weekend!

 

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