On March 10, ECB president Mario Draghi pulled out his bazooka and fired what was supposed the be a shock and awe blast of QE that would sink bond yields and the euro.
Instead the euro rallied along with yields on European bonds. Traders front ran the the announcement and the trade is unwinding.
European bonds had their worst month since August.
Bloomberg reports ECB QE Boost Can’t Save Euro Bonds From Worst Month Since August.
The first month of the European Central Bank’s expanded stimulus program has done little to aid the region’s government bonds.
Even as the ECB increased its asset-purchase program to 80 billion euros ($92 billion) in April, from 60 billion euros, sovereign securities headed for their biggest monthly decline since August, according to Bloomberg World Bond Indexes.
“The whole notion of the ECB stepping up their purchases in April and May has already been front run,” said Martin van Vliet, senior interest-rate strategist at ING Groep NV in Amsterdam.
Euro-region government securities handed investors a loss of 1 percent this month through Thursday, the Bloomberg Eurozone Sovereign Bond Index shows. U.S. Treasuries dropped 0.3 percent, while Japanese bonds returned 0.9 percent.
The five-year, five-year forward inflation-swap rate, which ECB President Mario Draghi has cited in the past to justify monetary easing, climbed to 1.47 percent Friday, the highest closing level in almost seven weeks, as Brent crude futures touched the most since Nov. 4.
Shock and Aw Shucks Revisited
Actually, the announcement fizzled immediately.
I said so on March 10 in Draghi’s “Shock and Awe” campaign morphs into “Shock and Aw Shucks”
Draghi’s plan worked for all of 15 minutes. The market then had second thoughts on the Euro, on gold, on the German stock market, and on equities in general.
Aw Shucks on the Euro
Aw Shucks on Gold
Euro Daily Chart
Draghi was hoping the euro would sink to boost inflation and help exports. Instead, after a brief intraday selloff, the euro rallied and it has continued along that path.
What Happened?
Clearly the trade was front run, but there is a bit more to it than that.
Draghi has simply run out of room to cut rates further into negative territory. It has to do with mortgages and bank losses.
For the full explanation, please see Is There a Limit to Draghi’s Negative Interest Rate Madness?
Mike “Mish” Shedlock
With financial asset prices already at nose-bleed levels, it would appear that to push them any higher, the ECB will have to really go “full Kuroda” on their purchases/money-printing. It’s beginning to look like Japan’s monetary lunacy has finally hit a wall, so it will be interesting to sit back and watch what happens there.
Zero rates, zero success in Japan – Bloomberg
http://www.bloomberg.com/gadfly/articles/2016-04-21/how-negative-interest-rates-have-failed-japan-in-four-charts
I think governments should stop issuing bonds or say what they spend and banks be allowed to do as they like. Banks and government working hand in hand in secrecy. Governments prints the money and the banks distribute it as they see fit.
Nope. It doesn’t work that way at all, and the reason that governments issue bonds is to cover their massive deficit spending and to refinance the bonds that they have already issued when they mature. In the US, the US Treasury issues more than $7 trillion in new US Treasuries each year. Banks do not get any money handed to them at all from governments. For an understanding how the US Treasuries markets work, see:
http://www.TreasuryDirect.gov
There’s an old saying. Insanity is doing the same thing over again, expecting different results.
I think the only thing wrong with this is the assumption that because the NIRP will trigger bank losses, and negatively affect mortgages that it will not be pursued.
These people have collectively lost their minds. I have no reason to believe they will act reasonably any longer.
Let’s all hope you are correct!
This is just the markets pulling away the curtain to expose the “Wizard”.
The market is in charge, but doesn’t know it.
Printing just oppresses the people. Let’s hope printing stops soon.
How does printing money “oppress” anyone?
How does printing money “oppress” anyone?
Good Grief
Printing money to bail out the banks is the very essence of the rising income inequality, repetitive bubble blowing schemes of the Fed.
The middle class has been destroyed and you are oblivious.
Mish
A whole bunch of German income is machinery sales to China. Pumps, turbines, controls, etc. China is winding down. Too much private debt. Way too much. As Germany goes, so goes EU banks. Draghi is behind the eight ball on this one unless he has a Bat phone to China and can order them to buy more stuff.
Draghi Challenge Highlighted as Inflation Rate Back Below Zero
The euro-area inflation rate fell to minus 0.2 percent in April, a worse out-turn than the 0.1 percent decline forecast by economists in a Bloomberg survey. It wasn’t all bad news for the European Central Bank president however, with the economy expanding 0.6 percent in the first quarter and unemployment declining in March to the lowest since 2011.
http://www.bloomberg.com/news/articles/2016-04-29/draghi-challenge-seen-as-consumer-prices-fall-more-than-forecast