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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?
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.
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