Delayed reaction doesnt look that way today and reaction is very positive.
http://macro-man.blogspot.co.id/2016/03/the-aftermath.html
risk on in most things.
Very cool that you are interested in this stuff. Macro Man is very reasoned on the whole.
The ECB announcement had surprisingly positive and negative points. On the positive side was an expansion of the quantity of asset purchases. The market had expected this to be extended to E70bn per month, instead it was moved to $80bn per month. In addition, the qualifying assets were expanded to include investment grade bonds for Euro Area 'established' non financial corporations. There was also an extension and an increase in potency of the Targeted Long Term Refinancing Operations via incentives that could see the lending rate get as low as -0.4% per annum. Paid to lend. Please note that these target loans to non financial corporations and residents except for property purchases.
The Deposit rate was cut to -0.4% as expected. But the other main rates were shaved a tiny bit.
A negative was that the Asset Purchase Program was not extended, possibly a trade off with the higher monthly spend.
The market reaction was initially positive, but this was quickly erased and reversed when Draghi essentially agreed with an increasingly common view that negative interest rate policy was not having the expected outcome due to the rates not being passed to depositors. The instrument is basically exhausted.
The Euro sold off. Equities initially fell. This initial reaction is important. It marks a very sharp contrast to the general pattern of financial market developments following previous stimulatory announcements. Until an underwhelming reaction to the last ECB stimulus efforts late in 2015, and the complete opposite-to-desired outcome from the BoJ cut very recently, these had been strongly positive. Now, we have three of the most recent monetary policy stimulus efforts unable to generate heat and light. In addition, we have the Fed with risk towards holding for a very long time but wanting to tighten. Stimulus and efforts to remove stimulus, are failing. When the CBs have been the only thing going for the period since the GFC took hold (apart from bail-outs, of course), this is an important development.
You say risk-on everywhere yesterday. Yes, it looks that way, but it is important to look underneath it. Also, I should be careful not to assign too much to the following observations.
+ Yesterday saw a rally in financials and energy. Financials trailed energy. Energy is the greatest threat to the solvency of banks at present. That link should be evident. There were inventory figures which boosted the outlook for energy. This was not the work of the ECB.
+ The expanded TLTRO program does not extend to offshore lending. It is extremely tenuous to argue that any stimulus to EA lending arising from TLTRO would flow through to the likes of JP Morgan. US Treasuries sold off when EZ bonds came in.
+ The net gain in EZ equities vs rest of world is not special in any way. Compare this to the QQE program outcome in Japan and what had been achievable by the Fed and ECB previously. The ECB did not impress equity investors in European markets.
The prior TLTRO program helped to stop bank lending from declining further, but there has been negligible movement in the stock of lending via the bank channel. This latest program is more powerful, but you have to ask whether the extent of lending will truly increase that much when:
+ the liquidity holdings of the major banks is so large relative to the loan books
+ the loan books have a lot of property asset loans
+ disintermediated credit for large and medium sized corporates has already grown heaps.
The returns now available from bank liquidity holdings will reduce at the same time as bank deposit rates with the ECB are lower which can't be passed on. Not good. The banks remain over-levered. Remember Deutsche recently. In order to loan, these guys have to issue stock. They have been reluctant to do so. This looks like some degree of pushing on string going on with the TLTRO.
Buying investment grade corporate debt does very little to help with disintermediated credit to the small business. This is the capital starved and high employment generating sector of the economy. IG corporate is able to source credit already, dropping the borrowing costs a bit will definitely help, but will cause distortions as well and, strangely, will encourage some sub-investment grade corporates to deleverage as they shrink their way to higher profits.
The Euro strengthened and the US Treasury, Australian Treasury and UK Treasury securities all saw their bonds sell off. EZ bonds came in. Growth is expected to bleed from the EZ.
On the whole, this picture is one of where monetary firepower in the ECB is clearly losing potency. It is interesting that Vice President of the ECB, Constancio, was just expressing concern that it is not a good idea to voice such a view when monetary policy is the only thing going...it'll be alright if we don't talk about it.
His comments introduce my final closing points. The EZ is not like other sovereign states with their own central banks. It cannot simple engage in a spend and monetise (helicopter money) routine. Further, due to austerity and EA agreements about deficit limitations, it cannot expand sovereign balance sheets strongly even as yields go to zero. It has less going for it than Japan in this regard.
Monetary policy in the EZ could be reaching its limits. If so, it doesn't mean crash and burn necessarily. It means finally accepting that it will be in a very protracted period of low growth. Maybe it will ignite a round of productivity enhancing activity, but the voters are looking increasingly to unconventional outcomes. The ECB/Draghi Put is less solid. Meanwhile, Yellen is intent to tighten policy at any reasonable opportunity...the Yellen Call. This latest outcome is a bear signal for your suite of considerations.