Clean sweep for Draghi?

January 23, 2015

European Central Bank President Draghi and Vice President Constancio leave after addressing an ECB news conferenc in Frankfurt

Mario Draghi’s peerless track record of eliciting the market response he wants remains unblemished after the ECB’s quantitative easing surprised on the upside – at 60 billion euros a month for at least 19 months it will exceed 1 trillion euros.

Whether it pulls inflation up towards target and galvanizes growth remains  uncertain.
We’ll get plenty of reaction today – on top of the German lawyer who declared he would mount a legal challenge before the scheme was even announced. German Finance Minister

Wolfgang Schaeuble is due to opine and German Chancellor Angela Merkel will face the press with Italian premier Matteo Renzi in Florence.  Merkel is concerned that the ECB’s new gambit should not be used as an excuse by euro zone governments to put economic reforms on the back burner.

Renzi, whose economy is still in recession, takes a different view, telling delegates in Davos earlier this week that Europe was currently “not in an economically correct direction” and that he hoped the ECB would help set a new tone. He wants a much lower euro which may start to arouse international tensions.

French President Francois Hollande, another proponent of more aggressive ECB action, speaks in Davos today. British and Japanese central bank chiefs Mark Carney and Haruhiko Kuroda are also appearing as is IMF head Christine Lagarde.

Markets reacted rationally to the headline numbers. Stocks surged, bond yields fell and the euro hit an 11-year dollar low.

An economic boost from QE would largely be achieved through lower borrowing costs and a weaker euro (which will help import inflation while making euro exports cheaper to sell) but with both having already fallen so far there is a question about how much more downside there is.

Italy, nobody’s idea of a flourishing economy, can now borrow for 10 years at just 1.5 percent.
Longer-term, the fact that 80 percent of the risk will reside with national central banks poses questions for the euro zone and its status as a common currency area.

Draghi said ECB decisions will be described as either unanimous, by large majority or by consensus. Consensus presumably = argument. There was unanimity on QE being legal, a large majority on starting in March but only consensus on risk-sharing yesterday.

Draghi downplayed that element of the agreement and he is right that it is irrelevant in terms of economics. But since the euro zone debt crisis flared, most analysts agree that more integration is needed to bind the bloc irrevocably together. Yesterday was a step in the opposite direction.

There is also little prospect of immediate help for Greece. Draghi said it wouldn’t be possible to buy Greek bonds before July, when some hefty redemptions come due, and Athens would still have to be part of a bailout programme to qualify. That must be uncertain with elections three-days away and anti-bailout Syriza poised to win.

Party leader Alexis Tsipras told an Athens rally last night that an end to “national humiliation” was near after opinion polls late on Thursday showed Syriza pulling further ahead – with a five to six point lead.

Austrian ECB policymaker Ewald Nowotny put his finger on a broader point. Yes, QE could be extended beyond September 2016 if inflation is still not moving back towards target – which looks like a significant victory over Bundesbank doubt – but the ECB has essentially fired its last bullet. One source told us that five of the 25 ECB policymakers opposed moving now.

With euro zone inflation now in negative territory and growth non-existent flash PMI surveys for the euro zone, German and France will give a first indication of how 2015 has begun for the currency area.

The death of Saudi King Abdullah overnight has seen his brother Salman take the thrown to douse any fears of a succession crisis and prevent any vacuum for its arch regional rival Iran to exploit. Oil has jumped fearing uncertainty over energy policy.

Analysts expect the new king to stick to an OPEC policy of keeping oil output steady to protect the cartel’s market share from rival producers. Incoming kings have traditionally chosen to appoint new ministers to head top ministries like oil and finance.

Ukrainian President Petro Poroshenko said his troops were holding the line against separatists and Russian forces after a sharp increase in attacks and the withdrawal of government defenders from Donetsk airport. He says there are 9,000 Russian troops inside Ukraine.

There are a clutch of potentially interesting credit ratings reviews today. Moody’s is due to run the rule over France and Britain while S&P will look at Belgium.

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