And, it’s Gone: Euro Reverses Aggressively on ECB. This is How it Happened.

2016-03-10 19:59:00

Talking Points:

- The European Central Bank made some large stimulus announcements this morning, and initially, it appeared as though they were warmly received by markets. But this reversed very quickly.

- During Mr. Draghi’s press conference, a markedly different tone took over as risk aversion began to show.

- We have the Bank of Japan, FOMC and the Swiss National Bank next week. Volatility will likely be here for a while; make sure your risk management has been addressed.

This morning produced one of the more noteworthy news events of recent. The European Central Bank delivered a veritable artillery of stimulus to markets by cutting all three key rates while also increasing the monthly bond purchases in their QE program by €20 Billion per month to bring the monthly tally to €80 Billion per month. Also, there was the unexpected announcement that the European Central Bank will also include non-bank corporate bonds of investment grade quality in their bond purchases. And initially, this was all very warmly received by markets, as we had discussed in this morning’s piece.

But it was during Mario Draghi’s press conference when matters appeared to have started to come undone. Mr. Draghi made a few statements that were taking very negatively by markets, and this produced some aggressive reversals of those prior moves. At this point, many of those target markets such as Euro-pairings and Euro stocks have moved even beyond their opening values, retracing all of the move from this morning and then some.

Given that these reversals began approximately 8 minutes after the beginning of the press conference (Mr. Draghi was two minutes late), it would deductively appear as though Mr. Draghi’s commentary was the catalyst for the move, and it was around this time that the European Central Bank had disclosed their inflation forecasts, which is expecting inflation to move up to only 1.6% by the end of 2018.

So, even with this rollout of numerous stimulus measures, it would appear as though the ECB is already expecting failure to meet the 2% inflation target, even as far as 2.75 years out and even with this constant onslaught of Central Bank liquidity. This isn’t a positive take on the outlook for the economy from the Central Bank.

A few minutes later, Mr. Draghi said “Rates will stay low for a long period of time and well past the horizon of our purchases,” adding later “We don’t expect it to be necessary to reduce rates further.” He later added in response to the question of ‘how low can rates go,’ with a retort of “Does it mean we can go as low as we want without having an impact on the banking system, the answer is no.”

That comment came out at approximately 8:58 AM ET, and this is when risk aversion began to really heat up as stock markets turned over the earlier morning’s gains. This comments, when taken together, can give the illusion that the ECB may be running out of tools. The chart below shows the EUR/USD with the rate decision and press conference overlaid with price action:

Created with Marketscope/Trading Station II; prepared by James Stanley

Some astounding reversals were seen in European stocks as well. On the chart below, we’re looking at the daily setup in the DAX (GER30).

Created with Marketscope/Trading Station II; prepared by James Stanley

One of the few attractive markets at the moment is in Gold, and as we’ve been discussing over the past couple of months, as Central Banks scurry to do more of the ‘same ol’ thing,’ Gold can continue to shine. We discussed the macro implications behind Gold in our forecast for last week, entitled ‘All that Glitters is Gold,’ and this is in reference to the fact that with most Central Banks actively deflecting capital flows, Gold can continue to shine until something changes.

Created with Marketscope/Trading Station II; prepared by James Stanley

On the chart below, we’re looking at a near-term setup on Gold. With price action trading so close to resistance, traders are likely going to want to wait for a more well supported entry. A few potential levels for such a strategy are shown on the chart with red boxes.