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Draghi hesitated on further rate cut; Market experienced double-edged kill

By Margaret Yang

Early last night, ECB released a bigger than expected package of stimulus: 10 bps of deposit rate cut, expanding the amount of monthly securities purchasing to 80 bn from 60 bn Euro, and adding investment grade non-bank corporate bonds into their shopping cart. Equity markets responded positively right after the decision, with the DAX rallying more than 2% in the early market while the Euro fell over 1.2%.

However, about 1 hour later, market reversed sharply after Draghi’s comments which hinted his unwillingness to venture deeper into the negative rate territory because of the impact on banks. Euro strengthened over 300 pips while the DAX future plunged over 5% from its day-high and closed at 2.3% lower. European banks, on the other hand, were the biggest winner as ECB decided to provide liquidity through Targeted Longer-Term Refinancing Operations (TLTRO) with a rate as low as 0.4%.

This was a double-edged kill to the all-day traders last night. No matter which side you choose to take a position, you may easily get kicked out on the opposite side. The reason behind is still the lack of confidence in the economic outlook, and also, the effectiveness of the central bank’s capability to rise inflation. Plus, the ECB’s stimulus was very much anticipated and priced by the market previously, therefore, any bits of surprises could lead to rising volatility.

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Germany 30 –Cash

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About the author

Margaret Yang Yan, CFA, is a market analyst for CMC Markets Singapore.