Beware the Mouse

ECB day, and all through the house, no creature was stirring, not even a mouse. Yes, today is supposed to be the day that the unexpected QE junkies at the European Central Bank hit the off switch and go cold turkey. Well, switch to methadone perhaps. After all, they are expected to continue with their asset purchases, just at a slower pace, or for a shorter period of time. Extend and indeed pretend.

Perhaps it is the potential complexity of this decision that’s keeping the market so quiet. Here’s a nice summary of what’s happened so far, from Frederick Ducrozet (@fwred):

So the market reaction all hinges on whether it’s less for longer or more for shorter. Clear?

Hmm, indeed not, and well done Mario Draghi for already setting up the smoke and mirrors. A few leaks over the summer suggested he might reveal something at Jackson Hole; but no. Then it was going to be the September ECB meeting; but not quite, not just yet. We were expecting some full blown Harvey Weinstein action; instead he couldn’t even deliver Mark Carney’s unreliable boyfriend routine. Very cleverly he has set up expectations to be as follows: the ECB is turning the taps off, but slowly. In which case, a collective shrug of shoulders, and back to selling vol as the Euro goes nowhere.

It’s particularly clever as this turning point is significant. Regular readers have seen countless charts of how aggregate global central bank assets have been heading higher and higher, despite Fed rate hikes etc. It turns out the Fed didn’t stop, they just passed the baton. And now we are on the last relay runner in the final straight. We should be looking up to see a last ditch pelt at the finish line is going to result in a panting collapse sometime very soon.

Oh but ECB QE – never was so much owned by so many to so many. It was the gift that kept on giving. These guys didn’t just buy government bonds, they moved into corporates too. Credit spreads tightened. The big buying crowded out private investors. ECB QE said, there’s one bloody great big buyer out there, join in if you can or get out of the way. And then passive pension money flowed on after it, and so on, and so on. So there is an important signal today, however it’s pitched. A big player is stepping off the merry go round. Stay on the virtuous circle if you like, but momentum is, at the margin, slowing.

Before the ECB we get the Scandinavian central banks. The Riksbank must be delighted to think they can end their mad QE experiment soon. Buying bonds in a country with one of the lowest debt to GDP levels in the world was always going to supercharge the experiment (hello Stockholm real estate prices!). With Eur/Sek within a sniff of the year’s highs at 9.8000, and inflation up at 5 year highs, the Riksbank have got to be able to pull back some stimulus now. If they do, a few hours ahead of the ECB, then it’s a good signal that Mr Draghi is finally happy to turn off the taps. But reassuringly, as he usually does. With Germany still to form a government he won’t want to rock the boat too much.


Just as well he’s steered it into becalmed waters with sleeping passengers on the big day then. Trouble is, even a small surprise might  cause an upset.

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