< Back to Trader Blog Articles

ECB meeting fails to meet expectations

  • Risk Manager
  • Blog post submitted on 4th December 2015

In a surprise twist of events, the ECB’s meeting yesterday concluded with measures that failed to rise to markets’ expectations despite Draghi’s reputation of being a central banker that is willing to “do whatever it takes”. This is not to say that the ECB’s President shied away from adding to the stimulus program as he did effectively announce that the bond-buying program will go on for longer than earlier expected. However, the consensus among investors was that the monthly value of the programme will be increased from the current EUR60 billion target. In turn, the mix of steps taken yesterday increased the value of eligible securities, as bonds issued by regional and local governments were added to the list as were the instruments yielding between -0.3% and -0.2% (after the deposit rate was cut by 0.1 percentage points to -0.3%).

Apparently the disappointing scale of the new wave of monetary easing reflects ECB’s optimism on growth outlook as the bank’s staff kept its GDP forecasts unchanged despite trimming the inflation projections as “the persistence of low inflation rates reflects sizeable economic slack weighing on domestic price pressures and headwinds from the external environment.”

From my point of view, Draghi’s speech and clarifications provided in the Q&A session painted a rather mixed message as he failed to strike a convincing tone that these measures are sufficient and adequate and in turn gave the impression that ECB is trying to keep some fire power. The way I see it, the reaction of the markets in the aftermath of the meeting shows a similar interpretation. That is, despite the size of the new round of stimulus being smaller than expected, the stock markets should have escaped a strong dip should they have been persuaded in believing that the economic outlook is good enough not to warrant more than it was decided. The market measures of inflation expectations also suggest that Draghi’s message was not fully embraced by investors with the 5 year-5 year inflation swap closing the day lower.

At the other end, the reaction in the bond markets could signal that ECB’s more optimistic than expected message touched some hearts. The German bonds for instance (the benchmark Euro yield curve) experienced significant moves, with the 10 year rate spiking to close to 0.7% from less than 0.5% (equivalent to a price drop of 1.8%); furthermore, whereas the yields up to (and including) the 7-year maturity bucket were negative prior to the meeting, they rebounded strongly after the ECB press conference. Such a reaction could signal that investors a pricing in a better inflation/growth outlook but it could as well be that investors were positioned for additional liquidity. Indeed, the rally seen over the past few weeks suggests that yesterday’s correction was driven by technical factors not fundamentals.

As the markets strive to recover from yesterday’s disappointing session, they will also have to contend today with a string of labour market data coming from the US. In my opinion, a strong figure could help the US markets rebound even if weakness persists in the European space. For the USD high yield market another pivotal factor continues to be the oil price with the OPEC meeting perceived as a market driver.

Have a nice day!


The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

The information provided on this website is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Similarly any views or opinions expressed on this website are not intended and should not be construed as being investment, tax or legal advice or recommendations. Investment advice should always be based on the particular circumstances of the person to whom it is directed, which circumstances have not been taken into consideration by the persons expressing the views or opinions appearing on this website. Calamatta Cuschieri & Co. Ltd. (CC) has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website. You should always take professional investment advice in connection with, or independently research and verify, any information that you find or views or opinions which you read on our website and wish to rely upon, whether for the purpose of making an investment decision or otherwise. CC does not accept liability for losses suffered by persons as a result of information, views or opinions appearing on this website.
This website is owned and operated by Calamatta Cuschieri & Co. Ltd (Co. Reg. No. C13729) of 5th Floor, Valletta Buildings, South Street, Valletta VLT 1103, Malta. CC is licensed to conduct Investment Services in Malta by the Malta Financial Services Authority.