Article 24FET Markets soar as ECB extends QE programme until December 2017 – as it happened

Markets soar as ECB extends QE programme until December 2017 – as it happened

by
Graeme Wearden
from on (#24FET)

European Central Bank says it will conduct an extra nine months of quantitative easing, but cuts bond purchases from a80bn to a60bn per month

4.30pm GMT

A late newsflash: German media are reporting that the head of the Bundesbank, Jens Weidmann, opposed today's moves:

This explains why Draghi couldn't say that the decisions to extend QE was unanimous.

BUNDESBANK CHIEF WEIDMANN DID NOT AGREE WITH THURSDAY'S ECB DECISION ON EXTENDING BOND PURCHASES - FAZ

4.29pm GMT

Lena Komileva of G+ Economics has fired over a useful explanation of the ECB's policy measures, and the way it has steepened the yield curve on eurozone debt:

This is important. The ECB is prioritising yield curve steepeners: the policy decision to embed a technical "taper" in its 9-month QE programme extension, by scaling down its monthly purchases from a80bn to a60bn, to ensure policy continuity, sends a clear signal that there is a limit to how far the ECB's QE can run and how high the ECB's balance sheet can grow beyond 2017, before it runs into hard technical, and political, constraints.

The ECB's announcement of changes to the parameters of the asset purchase programme from January by increasing the maturity range to 1-30yrs from 2-30yrs and buying assets yielding below the deposit rate ("0.4%) for the first time - also led to a sharp declines in the yields at the short end of the curve, reinforcing a curve steepener bias. The prospect of tapered monthly purchases and lower-for-longer negative yields means that the ECB's reflation channels have shifted in favour of a weaker euro and higher equity markets, with negative discount rates and a cheaper exchange rate clearly benefiting stock valuations.

4.22pm GMT

PS: It's also worth checking out the German government bond market tonight.

The yield on short-term bunds has fallen deeper into negative territory, meaning prices have jumped because the ECB has now given itself the ability to buy this debt.

CHART: German sovereign curve today vs yesterday. Steepening after #ECB decides to extend QE + scrap depo rule. Everything < 8Y rallying. pic.twitter.com/BtfEEyZxZc

10yr Bund yield reacts to ECB:
Tapering - sell
No, wait, more purchases - buy
No, wait, collateral lending + yield floor scrapping - sell pic.twitter.com/3qv9kgSptk

4.03pm GMT

Here's what you need to know about the European Central Bank's decision.

There are indications of a somewhat stronger global recovery. However, economic growth in the euro area is expected to be dampened by a sluggish pace of implementation of structural reforms and remaining balance sheet adjustments in a number of sectors.

Our estimate of the increase in QE horizon after ECB's decisions (pace; floor; maturities). Shorter in practice as this is only an "option". pic.twitter.com/SCsbOoYODk

"The natural way to look at a word like that is to have a policy whereby purchasers would gradually go to zero, and that's not been discussed or, as a matter of fact, it's not even been on the table."

The problem is that however much Draghi tried, and by the end of the press conference he was not only very irritated by the endless taper questions and stumbling in terms of explanation, he could not refute the point that cutting to a60bn/month could be a staging post to further cuts, because it is simply not refutable.

It may not be their intended path, but it is not out of the realm of possibilities.

Aberdeen AM: "They've reduced the amount of purchases and the duration of them. That's a taper."
Draghi: https://t.co/jCp26UpsCN pic.twitter.com/AbTp4tlV0F

This might help pic.twitter.com/g0EO6eJ4NQ

The ECB had to change its standards for bond purchases to ensure that its QE programme did not disrupt the debt markets. It will now include bond purchases below its own deposit rate, which is already -0.4%. Thus, the ECB will be paying to hold some bonds that will be included in its QE programme.

The craziness doesn't stop there, some of those bonds have a negative yield because of the ECB's QE programme in the first place. This meeting has been like a financial version of Alice in Wonderland.

#Euro set for parity with USD after very dovish #ECB surprise. QE programme extended by 9 mnths, no discussion of tapering #Draghi @EburyUK pic.twitter.com/sEGwksTG84

"The euro plunged after ECB chief Mario Draghi presented an unexpectedly dovish outlook on monetary policy, hinting that QE could go on for years if required.

In fact he even said the QE programme is 'in effect open-ended' and the overall dovish tone of the announcement means EURUSD is down 1% having risen earlier in the day. It's fair to say this is at the dovish end of what markets had expected.

"It is difficult to judge the effect of these big events,not only the election of Mr Trump, but Brexit, the defeat of the Italian referendum.

Markets proved much more resilient than people expected them to be. This probably has many reasons, many causes. One of these is certainly the good work that regulators have done ... All these events ... have effects that by their very nature are going to develop their full dimensions in the medium to long term ... these consequences are very difficult to assess now."

3.33pm GMT

Frank Engels, head of fixed income at Union Investment, explains why shares have jumped:

"Today's ECB decision was a very smart move of Mario Draghi.

Lowering the monthly purchasing volume, abandoning the yield floor for security purchases and extending the program's maturity should cause the yield curve to become steeper, with the short end firmly anchored. This is a strong support signal for equities, particularly for banks and insurance companies. It is bearish, but not overly bearish for rates, though. We consider today's decision to be the first step out of the ECB's QE."

3.02pm GMT

Stock markets on both sides of the Atlantic have jumped, as the promise of more cheap money raises spirits on the trading floors.

BREAKING: Dow Jones Industrial Average opens at new all-time high. https://t.co/ySV4w1Dx1b pic.twitter.com/U37UvU9clm

2.35pm GMT

Q: Why didn't you decide on an open-ended QE extension, rather than just committing to buying more bonds for another nine months beyond March?

Our programme says it goes until December 2017 or beyond, if necessary, and until we see a sustained rise in inflation, Mario Draghi replies.

It is, to an extent, open-ended -- it's state-dependent.

Draghi: Cash will be accepted as collateral for securities lending

Eurosystem introduces cash collateral for PSPP securities lending facilities https://t.co/3gDM3Yun7J

2.30pm GMT

Q: How important is the recent rise in the oil price?

It's an important change, says Draghi, driven by better demand conditions, better supply conditions, and the reestablishment of some international agreements.

2.27pm GMT

Q: What's the advantage to doing an extra nine months of QE at a60bn per month, not a80bn for six months?

Draghi says the ECB wants to ensure a sustained pressure on market prices, without distorting them of course (perish the thought, Mario!)

2.25pm GMT

Q: Your colleague Mr Mersch hinted recently that tapering might be discussed today, but you say it wasn't discussed. So how should we interpret these conflicting signals?

I tell you what happened today, it was not discussed, insists Draghi curtly.

Draghi down to one word answers.

(Tapering something today)

Mario Grumpi

2.21pm GMT

Q: How would you respond to critics who say you have "stifled" the push towards economic reforms in Europe, by easing monetary policy so much

Draghi gives a little sigh, and then replies.

2.16pm GMT

Q: How would you respond to claims that you are biased towards Southern Europe countries, such as Italy, by extending your QE scheme?

Draghi smiles, and says "no, of course" the ECB is not biased.

2.13pm GMT

Q: Won't the ECB take a loss if it buys government bonds below your deposit rate?

Our aim is to ensure price stability, not to make a profit, declares Draghi nobly

'Buying below the deposit rate implies a loss, but our goal is price stability, not a profit'- @ECB's Draghi @CNBC @CNBCi

2.10pm GMT

Q: What can central banks do in this current time of uncertainty?

We must keep a steady hand, Draghi declares, giving governments the opportunity to strengthen economic growth and create jobs.

Draghi: Central banks should keep a steady hand

2.08pm GMT

Draghi is then asked about the US election.

The financial markets have proved "more resilient" to the shock caused by the Brexit vote, the US election, and the Italian constitutional referendum, says Mario Draghi.

All these events, especially Brexit and the new administration in the United States, have effects which by their very nature will develop their full dimensions in the medium-to long term.

So we'll certainly see consequently in the medium-to-long term.

2.03pm GMT

Draghi says he doesn't expect any legal problems following today's changes to the ECB's QE scheme.

The 'self-imposed boundaries' that we have changed today are not the ones which were needed to ensure the programme fell within our mandate, he argued.

2.00pm GMT

Q: You forecast an inflation rate of 1.7% in 2019 - is that close enough to your target (of close to, but below, 2%).

Not really, Draghi replies

Important point of #Draghi: 1.7% inflation in 2019 is not really close enough to the 2% objective.

1.56pm GMT

Q: Why isn't this tapering, Mr Draghi?

Tapering implies cutting the purchase programme down to zero, and that hasn't been discussed, the ECB president replies.

Draghi: Tapering is a process whereby purchases would gradually go to zero. That has not even been on the table.

1.55pm GMT

Q: You've said you'll boost the pace of asset purchasing if conditions worsen, so would you cut the pace of asset purchases if conditions are better than expected?

We haven't discussed such a 'high class problem' says Draghi dismissively (dispatching the question into the stand for a six).

1.53pm GMT

Q: When might the ECB start tapering?

Draghi says today's decisions were taken to ensure the ECB has a "sustained presence in the market".

Draghi says the ECB is confident the Italian Government knows what to do

1.51pm GMT

The risk of deflation has more or less disappeared, but uncertainty prevails, says Draghi.

And he insists that cutting QE to a60bn per month in April 2017, from a80bn, is not a tapering.

1.49pm GMT

Q: What is the economic justification in deciding to start buying government bonds which are yielding less than -0.4%?

Draghi says that the ECB has decided to buy bonds yielding less than its deposit rate (currently -0.4%) 'to the extent necessary'.

It's an option, not a necessity.

1.46pm GMT

Onto questions...

Q: Were today's decisions unanimous:?

*DRAGHI SAYS DECISION ON QE EXTENSION HAD `VERY BROAD CONSENSUS' - not unanimous then

1.45pm GMT

Another dovish surprise: #ECB to remove deposit rate floor when tweaking QE technicals. Paves the way for QE infinity. Bonds pare losses. pic.twitter.com/N9Tw7iXhqd

1.44pm GMT

It wouldn't be a Mario Draghi press conference without a lecture to Europe's politicians to pull their socks up.

The ECB president calls for the "swift and effective implementations of structural reforms" to underpin the recovery.

1.42pm GMT

Important point: The ECB still sees inflation someway below 2% in 2019, at just 1.7%.

That suggests monetary policy will remain accommodative for some time.....

1.41pm GMT

The ECB has also updated its economic forecasts, and expects marginally faster growth and higher inflation in 2017:

Draghi: Eurosystem staff projections: GDP increase by 1.7% in 2016 (1.7% in Sept) and 1.7% in 2017 (1.6%), 1.6% in 2018 (1.6%), 1.6% in 2019

Draghi: Eurosystem staff projections: HICP at 0.2% in 2016 (0.2% in Sept), 1.3% in 2017 (1.2%), 1.5% in 2018 (1.6%) and 1.7% in 2019

1.40pm GMT

Investors are racing to buy safe-haven German debt, following the news that the ECB has removed the deposit limit floor on its QE programme:

#Germany 5-year bond yield falls 5bps, now below #ECB depo rate ~BBG
a
See previous tweet.

The euro is all over the place after ECB's decision to extend stimulus https://t.co/ehcPHsd3SV pic.twitter.com/oYnqdCTvgL

1.38pm GMT

Draghi says that the 'calibrations' announced today reflect the "moderate but firming recovery of the euro area economy" and the "subdued underlying inflationary pressures".

The ECB still expects the eurozone economy to recover at a "moderate but firming" pace.

'There are indications of a somewhat stronger global recovery' - @ECB's Draghi @CNBC @CNBCi

1.35pm GMT

HELLO! Mario Draghi says the ECB is changing the parameters of its QE scheme so that it can buy government bonds which are yielding less than its 'deposit rate' (currently -0.4%).

That means it could start buying ultrasafe government bonds (such as German short-term debt) which are too highly priced to fall within QE.

*DRAGHI SAYS ECB WILL BUY ASSETS YIELDING BELOW DEPOSIT RATE

ECB BUYING SUB DEPO BONDS

BOOM

#ECB's Draghi: Purchases of securities under APP w yield below deposit facility rate wll be permitted to extent necessary
a
Germany-tailored

1.32pm GMT

Mario Draghi is holding a press conference right now, to explain today's decisions.

He's reading out the statement released earlier (which I posted here)

1.22pm GMT

Financial blogger Jeroen Blokland shows how the European Central Bank's balance sheet will swell further next year, thanks to today's decisions:

#ECB '#TAPERING' in one chart! pic.twitter.com/RItYB2sWMZ

Creditsights: "what the ECB giveth the ECB also taketh away"
Amen.

The #ECB just added a new existential question for markets: does 'going smaller for longer' actually qualifies as #tapering? Answer is: NO

1.19pm GMT

The ECB's task of nursing Europe's economy back to health is "far from done", says Jennifer McKeown of Capital Economics.

She believes the ECB may have to boost QE in 2017:

Presumably, the Bank has been encouraged by signs that the economy is performing well in the face of political uncertainty at home and abroad. However, it clearly remains in cautious mode.....

In all, we see a significant chance that the ECB will have to increase the pace of its asset purchases again next year. And even if it does not, policy will be far more supportive than in the US, leading the euro to depreciate further.

1.15pm GMT

Today's announcement is both hawkish and dovish, says Kathleen Brooks of City Index.

There is no free lunch at the ECB - they give with one hand, and taper with another!

Was the statement dovish or less dovish than expected? The answer is both" The extension to QE is much longer than we expected, but the tapering announcement is almost hawkish, a mere three days after the Italian's voted No in its referendum.

1.13pm GMT

Government bond yields are rising, with the German 10-year bund up to 0.44%, from 0.34% last night.

That means investors are selling eurozone government debt following today's ECB decision, even though the central bank has promised to keep buying bonds for another nine months.

10y Bund yield 6bp jump on #ECB decision shows market focused more on reduction monthly volume from 80 to 60bn rather than on extension.

Most notable reaction in the bond market. Suggests market taking this as a form of tapering (even though ECB buying for longer)

It's not proper tapering in the sense that the ECB doesn't signal a further reduction, only possible increase. Asymmetric commitment. Still.

Slower for longer it is. a60bn until December. Bad news.

1.04pm GMT

Finance Twitter is all agog at today's ECB announcement.

Duncan Weldon of Resolution Group gets a mince pie for summing up the QE changes in five words:

ECB: more but also less.

#ECB reducing purchases to 60bn Apr-Dec. May want this to be viewed as attempt so sustain programme for longer than 6m, rather than tapering

Let's wait to see what Draghi says about changes to bond buying parameters #ecb

Doing the math, this #ECB decision provides more guaranteed QE than markets had expected. Could again be ECB disappointing though doing more

12.57pm GMT

The euro jumped sharply as the ECB announcement hit the wires, but has now dropped back below a1.08.

Traders may be noting that the ECB is pledging to run QE beyond December 2017 if needed, or pick up the pace of bond buying again if conditions deteriorate.

12.53pm GMT

Here's the full statement from the ECB, announcing that QE will run for an extra 9 months (I've bolded up the key points):

Monetary Policy Decisions https://t.co/kDZCPr1Qkf

12.48pm GMT

Breaking: The European Central Bank has extended its bond-buying programme until December 2017, meaning an extra nine months of quantitative easing.

But it has also started to 'taper' the scheme -- the ECB will only conduct a60bn of QE from April, down from a80bn previously.

12.44pm GMT

Interesting..., bond yields are inching higher as traders brace for the ECB decision, coming any moment.

The interest rate on German seven-year bonds has turned positive, for the first time since January [yields rise as bond prices fall].

Markets positioning for a hawkish #ECB

12.41pm GMT

Donald Trump's election win has changed the landscape for the ECB in two ways, says Unicredit's Erik Nielsen on Bloomberg TV.

It has pushed up the yields on government bonds (which tightens monetary conditions), but it has also weakened the euro (which loosens conditions).

12.36pm GMT

Economist Meg Greene reckons the markets would react negatively if the ECB started trimming its stimulus programme today:

The risks for the ECB's QE announcement today are asymmetric--v little downside for extending QE at current pace, big downside for tapering

12.23pm GMT

European stock markets are clinging onto their gains, as investors anticipate the ECB will announce a stimulus extension shortly.

That could mean we see big losses if Mario Draghi disappoints.

An extension to QE seems somewhat of a foregone conclusion, with the current programme due to expire in March and no current plan for winding down the scheme in place.

With market expectations already factoring in an extension, it is likely that the volatility could come about through any imposition of a tapering plan, with the bank having to find a way to gradually reduce the size of asset purchases as we approach the end of the programme.

11.59am GMT

Tension is rising in the markets, with just 45 minutes to wait until the European Central Banks announces its monetary policy decisions from today's meeting.

JP Morgan Asset Management global market strategist Alex Dryden reckons the ECB will extends its stimulus programme, but trim the amount of bonds it buys with new money:

"We expect the ECB will taper and lower their asset purchases to EUR 60 billion per month and extend the program by 6 to 9 months. However, the pressure on them to taper has declined in recent months, thereby increasing the chance that the keep the rate of asset purchasing unchanged and just extend the program by a few months.

Rewind to September 2016 and 23% of German bunds were eligible for purchase. That number has now risen to 53% after the November sell-off in bonds.

ECB President Mario Draghi's challenge at today's Council meeting is to broker a deal whereby he doesn't disappoint market expectations of an extension of the current (a80bn per month) asset purchase programme, while satisfying the demands of the more hawkish elements who want the pace of asset purchases to slow given the prospect of rising (but still low) core inflation and steady growth.

It's a fine balancing-act which may be achieved by extending the programme without specifying the pace of buying, or maybe could see an extension with a shorter period of commitment to a80bn/month.

#ECB meet today. Team think they'll both lengthen their QE programme and widen the pool of assets they'll buy. No taper until 2018

11.54am GMT

Over in Athens thousands have taken to the streets as private and public sector employees stage nationwide protests to mark today's general strike, the tenth this year.

"Lenders are asking for the impossible, for primary surpluses that will be absurdly high for the next ten years. That means there will be more cuts in pensions and wages, more poverty, more despair,"

Protesters at anti-austerity march chanting "People Will Resist" - during general strike #Greece #IIIII^3I^1I pic.twitter.com/yjUU9Rz4dS

PAME union march about to start. Neighbourhood dog chose the right time- right spot to scratch & take nap #Greece #austerity #pets #strike pic.twitter.com/5v63XmWaOe

11.45am GMT

Shares in two of Britain's largest bookmakers are falling faster than an unlucky punter's bank balance, after MPs announced a clampdown on fixed-odds betting.

11.12am GMT

Newsflash from Brussels: The European Commission has just launched legal action against several countries, including Germany and the UK, over the Volkswagen diesel emissions scandal.

Germany, Britain, Spain and Luxembourg are in the dock for not hitting VW with the same sort of tough sanctions which the company faces in America.

"National authorities across the EU must ensure that car manufacturers actually comply with the law."

#BREAKING EU launches legal action against Germany over VW emissions scandal

10.58am GMT

Shares in UK outsourcing group Capita have hit their lowest since the summer of 2006, after it hit investors with its second profits warning in three months.

Capita warned that it faced "near-term headwinds", as it announced plans to cut costs and sell of some businesses.

9.52am GMT

Top ECB watcher Fred Ducrozet predicts the ECB will extend QE by six months at its current rate of a80bn per month, but retain the option to possibly taper next summer.

He says the ECB must tread carefully today, to avoid spooking the markets:

Amid growing evidence of a more robust recovery and improved policy transmission, there is a case for a reduction in the pace of asset purchases at some point in 2017, if anything because stocks matter more than flows in the ECB's view.

However, signalling an eventual tapering of asset purchases now would almost certainly trigger an unwarranted tightening of monetary conditions, or 'taper tantrum', that might jeopardize the recovery and force the ECB to do more.

Our ECB call in one table.
Full preview here: https://t.co/eyDAqwn4Vy pic.twitter.com/liVFNWVyQW

9.36am GMT

The euro just hit a three week high against the US dollar, at $1.0799.

That may show that traders aren't expecting Mario Draghi to be too dovish today.

9.19am GMT

Kathleen Brooks of City Index reckons that the ECB may only extends its stimulus programme by an extra three months beyond next March.

She says there are two good reasons for Mario Draghi to sound conservative today; a) the eurozone economic data has been quite good recently, and b) the ECB has been running out of eligible bonds to buy.

9.07am GMT

Traders are bracing for Mario Draghi to create a lot of volatility in the markets today.

Most economists expect the ECB to announce an extension to its QE scheme today, but there's no consensus on these details:

Euro volatility soars ahead of ECB's expected stimulus extension https://t.co/xxAHAxX8lL pic.twitter.com/TcGigkyF5i

8.51am GMT

Sports Direct shares have fallen by 5% at the start of trading, after it reported a sharp drop in profits.

"I begin to question whether this intense scrutiny is all ethically motivated."

Wait despite FRC probe into Mike Ashley's brother's business - Sports Direct has now entered into agreement with Ashley's daughter Matilda!

Related: Sports Direct chairman hits out at critics as profits plunge by 57%

8.30am GMT

European stock markets have risen at the start of trading, on hopes that the ECB will extend its stimulus programme today.

All the main indices are up, with Germany's DAX hitting a new one-year high.

While the previously soaring banking stocks have cooled down somewhat, arguably because Italy has asked the ECB to give it until mid-January to rescue Monte dei Paschi, the DAX and CAC have immediately begun to build on the various highs struck on Wednesday.

That is because the Eurozone central bank is likely to announce an extension to its quantitative easing programme later today, with analysts expecting Mario Draghi and co. to move the bond-buying deadline beyond its current March 2017 end-point

8.11am GMT

The Italian government has written to the European Central Bank, demanding that it gives them more time to rescue Monti dei Paschi (MPS), says the Financial Times today.

A so-called precautionary recapitalisation would involve imposing losses on subordinated debtholders and the indemnification of retail bondholders, the people said. The ECB is due to review the request as early as Thursday.

The ECB is understood to be unwilling to reveal its position until a letter is received. But bankers argue the supervisor is under pressure to take a tougher stance on MPS, which failed the European banks' healthcheck in 2014 and 2016, potentially paving the way for the latest stand-off between Italy and EU authorities.

7.58am GMT

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

It's #ECB day! pic.twitter.com/vbfLSYmUaT

Related: Glencore buys stake in Russian state oil firm Rosneft

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