ECB Today – Winter Is Coming

We have been so caught up in the month end USD frenzy that I clean forgot about the ECB today ! And what a day it will be because they are expected to announce the details of their unprecedented sweeping QE programme that will save the world, the financial markets, at least because we are still far from that Ebola cure or vaccine (because people are too poor to pay for it).

What did Draghi promise us at Jackson Hole ? The promise that led to the massive market rally and historic highs and lows that we are still coming to terms with.

He promised a € 1 trillion asset purchase programme that will buy poorer quality assets (eg. Greek bonds) and ABS of course. And German bunds proceeded to plunge driving everything 3 years and below to negative yields.


And IMF is obviously not referring to the bubble there because Lagarde strongly welcomed the measures taken by ECB to counteract the dangers posed by an extended period of low inflation before they came out to warn that “excessive risk taking and geopolitical hazards pose new threats to a global economy already experiencing an uneven and weaker than expected recovery“.

And there are not enough bonds to meet the ECB’s trillion.

The derivatives markets are suffering from all this negative rate business as EONIA overnight fixings fall under zero, causing headaches for all those swaps because borrowers end up receiving money instead of paying.

eonia rates

Is that enough for Europe ?

No. Because Germans are not borrowing or spending.


Ha. And they cannot be forced to even if Germany’s current account surplus for 2013 was the largest in the world at 260 bio.

What we do not need is ECB to blanket bomb Europe to borrowing because they are already all up to their eyeballs in debt except Germany. They just need Germany to start and is something Germany is working on which may take the heat off Draghi.

With the Russian embargo, I think matters will only get worse because Europe exports real stuff to Russia (including undelivered warships) and imports their energy needs from them. And I know its too early to talk about it but … Winter Is Coming.

So the good news is… I wouldn’t worry about inflation.

Note that the Eurozone inflation surprise indicator is moving up because expectations are already so low.


The bad news is that Europe is going to be stuck in a blue funk for a while because no one is going to be borrowing anything as the ECB would like them to when things are looking so uncertain, worrying about Scotland in their backyards,  with the Fed on hike-alert and Ebola on US shores.

Deficits are rising in Greece again and Spain is on a quick recovery roll as they added prostitution and drugs into their GDP data.

With the EUR weakening 4.28% in the past 6 weeks, I wonder on the need for ECB’s QE because their job’s half done. 4.28% imported inflation instantly ! EURUSD at 2 year lows.

Latest IMF data show that global central banks have been net sellers of EUR in Q2 and that trend would have most definitely continued into Q3 after Draghi. Within the central banks,  EM central banks have been the biggest sellers while developed nations have been accumulating small amounts. It just says to me that EM central banks are bigger punters and have profit accountability, making them a powerful trading force that will continue to skew market momentum in the future.

Anyhow, we cannot expect EUR reserves to rise anytime soon because of the EM currency weakness lately. And as we have come to learn, after the Shock & Awe of the first QE, nothing is ever good enough, not Abenomics and none of the LTROs.

Thus, the probability of a disappointment in ECB tonight at 745 pm will be HIGH and we shall have the usual “fireworks” like we do every time we have the ECB and like I repeat like a broken record each time.

My expectation is for EURUSD to make a new 2 year low later to 1.2530 before rebounding back up to 1.27 just to make sure the carnage is complete. Afterall, inflation will be back with Winter ahead.