I Want Candy

Last week the People’s Bank of China unleashed their latest Deus Ex Machina on the financial markets in an attempt to keep Shanghai stocks above a certain level that a minister somewhere believes to be crucially important because the characters written backward signify “good luck” or some such omen.

It didn’t work, but there will be plenty of chances to do even more once the National Holiday and commemorative parade of tanks and bombs is over.

So this week it was the ECB’s turn to bring the candy. Mario Draghi did not disappoint.

Via Barclays:

The ECB in its regular monetary policy meeting kept policy rates unchanged but decided to modify an important parameter in the asset purchase programme.

ECB President Draghi insisted on the willingness, readiness and ability to do more if needed. He also re-iterated that the QE programme provides sufficient flexibility should the ECB decide to expand the size, composition or duration. President Draghi mentioned that there was no discussion about a potential deposit rate cut.

Basically the interpretation is that Draghi just left the door open to expand QE in light of the appalling inflation data and market volatility. Again, it was his turn after all. In a couple of weeks it will be Janet Yellen’s turn. The implied probability of a 25 basis point hike, based on bond traders’ positioning, is roughly 50%. In other words, flip a coin. My guess is that a non-hike would be accompanied by the usual promise to be “data dependent” (read: S&P 500 dependent). Alternately, an¬†announcement of a 25 basis point hike would come along with a kind of hinted-at promise that this is the last one for a long time.

In other words, more candy but in a different wrapper.

As I write, the euro is plunging against the dollar and US stocks are ripping higher.


ECB leaves door wide open for more QE
barclays – September 3rd, 2015


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