The Hard-Nosed ECB Is Changing Its Stance

Published by Filipe R. Costa on Tue, 07/05/2013 - 10:43 in


ECB, PMI, Draghi

Daily Market Commentary for May 7: The hard-nosed ECB is finally willing to do something for the Eurozone. The move is welcomed but the motivation behind it is wrong.

The ECB could have avoided most of the financial crisis negative effects hitting European peripheral countries if it moved earlier to avoid the Euro appreciation, the rise in sovereign yields and the contractionary monetary policy it implemented during tough times. But Germany hadn’t allowed it.

Unfortunately for Germany, the austerity measures the country insisted to apply everywhere finally gave some (un)expected results - Europe is in deep crisis and Germany is now downturning, just diving in the sea. The latest PMI data shows another month of business contraction for the EZ as a whole and this time even Germany is part of the red list. The situation led Draghi to finally cut the ECB key rate from 0.75% to 0.50% last week and to discuss the possibility of cutting its deposit rates to a negative number to entice commercial banks lending money instead of parking it at the ECB. We will finally have the ECB committed to do something and that will push the Euro down, especially against the pound as we already mentioned a few days ago.

Last week’s job report coming from the U.S. showed a better than expected headline number, a decrease in the unemployment rate and a huge upward revision in past numbers. This has been a trigger for new equity rises but it seems that the rally is losing steam now. Yesterday’s EZ PMI data, the Reserve bank of Australia’s rate cut, and Draghi’s vocal intervention, all show how fragile the world economy is right now and thus not compatible with the current record highs we see in US markets. A bubble is forming and will have to be burst sometime in the near future.