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Trigger-happy markets re-evaluate Draghi disappointment

Is this another 'LTRO' moment for Europe? Did Mario Draghi come up with a master plan after all?

 
Trigger-happy markets re-evaluate Draghi disappointment

Why are markets rising today? What has changed since yesterday’s sell-off, triggered by European Central Bank president Mario Draghi’s failure to meet expectations for instant, bold action in Europe?

On a day when one might not expect strong gains – as investors tread water ahead of the US non-farm payrolls jobs report – the FTSE 100 is up over 1% at 5,723, with other European equity markets making even stronger gains. The euro is also higher at $1.2239.

Some traders are drawing parallels between the sharp market falls yesterday, and any potential subsequent gains to follow, with what happened when the ECB launched its ‘LTRO’ cheap bank lending scheme back in December. Markets were initially unimpressed, but then rallied for several months on the realisation that a ‘Lehman event’ had been avoided in Europe.

David Jones of IG Index reckons part of today’s gains can be explained by this realisation that yesterday’s sell-off was an over-reaction. ‘There is an overall feeling of having gone too far too fast’, Jones said.

'What Draghi is proposing goes a lot further then was expected,' says John Magrath of TwentyFour Asset Management. Draghi did after all suggest that the ECB had a bond-buying scheme in the pipeline, while some economists interpret his comments as meaning that another round of LTRO lending could be launched. Crucially, a bond buying scheme may not be ‘sterilised’, Draghi said, which could mean it more closely resembles a quantitative easing scheme. 

Adrian Redmond, a trader at JN Financial, disagrees with the optimists and is selling into today's market strength. ‘I’m amazed at the way the market has held on the way it has today. Draghi has done nothing again… At the very least he should have cut interest rates just as a token gesture. ‘

Those market gains could all evaporate if the US jobs figures are disappointing, he adds.

Muddying the water further is the strange trend this year of bad news warranting a positive market reaction. If, say, US jobs data is disastrous, markets may rise as traders get excited about the increased potential for action from the US Fed. This could well happen this afternoon if consensus expectations aren’t met by the payrolls report.

Jones, who attributes part of today’s market rise to anticipation of the US numbers, questions whether it has it become a ‘one way bet’ for investors.

13 comments so far. Why not have your say?

Geoff Downs

Aug 03, 2012 at 11:43

Look there's no mystery why markets keep rising. Investors believe the Politicians and World Banks can fix the economy. It would be good if this website could produce details of what QE has done so far for the real economy apart from helping stock markets to rise. Could you please find an expert who can tell us how Draghi's proposed plan will help solve the problem which is that the World is drowning in debt.

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John Lacy

Aug 03, 2012 at 11:57

Markets usually move because they are being manipulated by the big players on the back of rumour, innuendo and good old fashioned lies. Any sane person will sell up on the rising market and wait for the little darlings to crash it again and then buy back in temporarily until the next manipulation happens and then sell again.

There's no such thing as a "normal" market any more!!

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MC

Aug 03, 2012 at 12:01

Geoff QE has nothing to do with the real economy, that was all lies. The sole purpose of QE is to offset the vast amounts of deleveraging being undertaken by the UK Banks which has strangled money supply. To put simply despite £357bn of QE M4 money supply is still falling. Qe is not about stimulating the economy it is about turning a deleveragign crash into more a slow slump.

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William Phillips

Aug 03, 2012 at 12:57

The trouble with this demand by naive market players who cannot see beyond the ends of their noses for 'tough' and 'decisive' EU action is that it is political suicide for the 'project' to do that. Getting share prices back up and national debts down is not the be-all and end-all.

Already the application of mild austerity in Greece and Spain has provoked civil commotion; but middle class Germans, thrifty and hard-working, have far more devastating ways of making their hostility felt if they feel they are being fleeced and forced to write blank cheques to bail out lazy, corrupt Mediterraneans.

Polls now show for the first time that a majority of Germans think they'd be better off out of the EU. Used to being tyrannised, they let themselves be conned into giving up the mark for the euro on the nudge-nudge, wink-wink assurance that they would be top dogs in a new superstate. Instead they have become the cow every deadbeat EU member dreams of milking for ever more.

Beware the wrath of Teutons who are conned out of their wealth and morally blackmailed. We know the sequel to WW1 reparations and Weimar inflation. Is the self-sufficient, flourishing economy Adenauer and Erhard built out of the ruins of 1945 is to be hazarded at the command of an Italian banker? I doubt Fritz and Helga will play ball. Indeed, the apologetic cringing that has been forced on Germany since Hitler fell could be a casualty of this blackmail. The Germans could say 'enough, already' to the implicit suggestion that they still have to make up for the Fuhrer by subsidising the continent.

So neither the rich benefactor nor the pauper supplicants are happy about being told they have to live more poorly for decades... because some unelected cabal of lushly overpaid bureaucrats and bailed-out financiers has decreed it and their own parliaments rubber-stamped it. Passive resistance will grow. There are plenty of ways of hobbling EU diktats besides rioting.

The patchwork quilt of wildly different histories, religions, traditions, attitudes and values that is subsumed by the geographical expression 'Europe' can never be dragooned into a single superstate with one economic, fiscal and monetary policy. It is an idle Utopian dream, which like the quasi-imperialist schemes which haunted the continent in the last century-- Germany's 'New Order', Stalin's 'Internationale', the USA's 'Nato'-- is foredoomed.

The crooked timber of humanity has evolved and diverged far too far since the days of the Roman Empire for such co-ordination to work-- certainly not without armed force, thousands who have sworn to die for the 'project', to cow the 300m people the federasts dream of ruling. Like species, the evolutionary drift of political orders is to subdivide and proliferate, not to be collapsed into the panmixia of treaties, flags, anthems and empty verbiage invented by the faceless ones of Brussels.

Shallow, rootless technocrats such as Draghi and the Vichy-style rulers whom Germany imposed on Greece and Italy are hopelessly ill-equipped to grasp the centrality and ineradicability of race and nation to Europe's multifarious and still splintering communities. The unelected bosses try to to row the other way, to persuade these diverse folks that only economics matters in politics and that a well-fed prosperity will make up for sacrificing all autonomy.

They are wrong, and they are evil. Nation-killing failed when Hitler and Stalin attempted it; why should the impotent blowhards of the EU pull it off?

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John Lacy

Aug 03, 2012 at 13:17

William Phillips---you are undoubtedly correct in what you say but unfortunately the damage to be done in France, Spain,Italy and Germany at their next elections is already almost inevitable.

The current centre right/centre left parties will be swept from power or at the very least forced into partnership with the extremists on both wings of the political spectrum.

Expect a backlash of stupendous proportion against the current mealy-mouthed opportunists who have destroyed years of social and economic growth. Unfortunately it will not be nation-killing but virulent nationalism that will be the victor and that is just as dangerous.

I think the UK government should concentrate on making us self-sufficient in food and power before ant hostile presence on the european mainland has the chance to inflict real damage

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David West

Aug 03, 2012 at 18:32

Why do so many people spew out so much gloom? Europe and the rest of the world will not come to an end tomorrow or at the next round of elections. Populations are much more sensible than people who write this sort of stuff give them credit for. The european mainland will not become hostile to us, and if it did becoming self sufficient in food and power would not stop the inevitable consequences. Politicians in europe, heads of government and the IMF and ECB have a very difficult job to do. They are not about to produce solutions just to placate the market and nither should they. The harsh reality is that for far too long a lot of people in most countries have been living beyond their means and this now has to be put right. The huge amounts owed by most western governments will partly be eased away by actually encouraging inflation. Whetever the politicians and central bankers say that is what they will do to bring down debt. In the interim everyone has to put up with things, even though some of us have not actually lived beyond our means and borrowed up to the hilt. Those people have to suffer for the profligate ones but whoever said life was fair? So, get over it - end of.

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John Lacy

Aug 03, 2012 at 18:53

David--I hope that you are right but remember it was arguably one of the most civilised country in Europe that was highjacked by Hitler so we have to be vigilant as it could happen again and not necessarily Germany this time around--the old phrase about history repeating itself is very apt.

As to your belief that the politicians who caused the sovereign debt problem will have the will and the gumption to rectify it is optimistic beyond any level of reason.

I'm not one of those that over-borrowed either but the overhanging problems of those that did will be with us for many years to come and blight our economy until some of the old fashioned values return.

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David West

Aug 03, 2012 at 19:11

Hi John

I'm not saying that they will be able to solve the debt problem but at least we need to give them a chance to try. It's all too easy to blame politicians, not to mention fashionable. However, the markets seem to be saying that if they don't get what they want quickly they will throw their toys out of the pram. Quick solutions to what is a very complex problem are not going to be arrived at over night. As for Hitler, europe is a very different and much more interwoven place today. Don't forget that union in europe was encouraged to ensure as far as possible peace lasted after the second world war and we dent this union at our peril. Whether we like it or not we are a part of europe and make no mistake, we need it. Old fashion values also are about helping ones neighbour and throwing spanners in the works when they are in trouble.

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David West

Aug 03, 2012 at 19:15

That should have read NOT throwing spanners in the works!!

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kenneth douglas

Aug 04, 2012 at 11:01

William Phillips. We may not like what you say, but you are so right and thank you for saying it.

David West. Do you have a spare pair of rose coloured spectacles; having any belief in Politicians or the Populations of Europe is the altimate in blind faith , one got us into this mess, the other do not have the guts to gets us out

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David West

Aug 04, 2012 at 12:53

Hi Kenneth

Blind faith has nothing to do with it. I am simply saying that because we are in the current situation brought about by governments and individuals over borrowing and sheer greed by most of the world banking sector,(although not all banks), the western world is in a financial mess and europe has compounded this further by having a single currency but not a unified federal financial policy for those countries in the euro. Cart before the horse is extremely fitting.

However, there is no point in slinging mud or spreading doom and gloom. The situation exists and is complicated. It will take time to sort out. Markets want a quick fix. Quick fixes invariably do not work. The current collection of governments and central banks along with the IMF are not going to pander to short termism just for the sake of placating the markets and in my opinion this is the right way to proceed. When a solution is arrived at we all want it to be adequate, and hopefully if they take their time to get it right, it will be. This is not looking at things through rose coloured spectacles as you put it but good common sense. I would remind you that we are in this current mess partly because of the short termism point of view of the markets which unfortunately now seems to rule them. Prudent instituations and individuals that invest for the long term and not just to make a quick buck are in the minority. This should be more of a cause for concern than the speed at which the politicians are proceeding. I don't wish to be priggish but as I say, the world is as it is currently and it will take a lot longer to sort this out than most of us would like but that's how it is and proffering doom and gloom does not help. Talking down etc. etc. instead of being positive. If that's looking at things through rose coloured glasses then I think I'll just go and give them a good polish.

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Beamtree

Aug 05, 2012 at 11:12

Can you people answer the question posed by the article please - why have markets risen when they may not be any justification?

All I have read so far are variations of well-enunciated reasons for the failure of the euro experiment in many other media -websites, papers, tv, et al !!!

If you dont know the answer, spare us the oft-quoted reasons why the euro has to fail - many of us have heard them before, so may times!!!

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Dr Jimbo

Aug 05, 2012 at 13:38

I agree with Beamtree. Why have markets risen when there is no apparent underlying logic? As an engineer it reminds me of the way energetic but undamped systems behave. A slight perterbation can then lead to major instability of even disastrous failure.

My own view is that incredibly low interest rates have contributed to this instability because there is no alternative realistic place to put money other than the markets. If bank deposit interest rates were, say, 5% the markets could not behave so irrationally because money value would be preserved and thus act as a damper. If interest rates fall to zero, money value is at the mercy of inflation and market perturbation. That's the way to money value collapse!

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