Last Thursday, the ECB chairman Mario Draghi again surprised the markets with more confusion. We all know that he is one of the most surprising chairman of the ECB with his actions and remarks. Yet, Thursday’s remarks added more confusion toward the ECB’s upcoming plan, leading to a notable rally in the Euro for a limited time. The currency then declined back sharply at the end of the day. On the other hand, DAX30 and European equities faced the same story, but dumped after the ECB’s announcement and pumped right after the press conference. So, why did all of this happen and how?
As widely expected, the ECB’s decision came in clear with no change in the deposit rate and the main rates. Moreover, the QE program size is also unchanged. Yet, this had a medium impact on the markets because the statement showed no comments regarding extending QE, which in return should be a Euro factor positive and negative for equities. However, the markets stayed calm for a few minutes after the decision, as everyone was awaiting the ECB chairman Mario Draghi’s Press Conference.
Two Statements Moved The Markets
In his press conference, the ECB chairman Mario Draghi confused the markets through two statements:
- ECB has not discussed extending QE in this meeting
- ECB has not discussed tapering QE in this meeting
Those are the two statements, which led the market to ask the following: if the ECB has not discussed tapering or extending QE, then what did they discuss?
The ECB chairman continued to add insult to injury by saying “December’s meeting will be important”. Decisions taken at the next meeting “will tell you what we’re going to do in the coming months”. But at the same time, he also said that they have not discussed December’s Agenda.
Those comments were enough to put the market in an uncertainty mode. However, traders and investors decided to dump the Euro and keep on buying equities.
Why Did The Euro Spike Then Tumble?
When the ECB chairman said that the ECB has not discussed extending QE in this meeting, the market understood that tapering is coming soon, which is considered a positive factor for the Euro. The Euro rallied all the way above 1.1020’s. However, when he noted that the ECB has not discussed tapering in this meeting, traders got confused. This is primarily because it would increase the estimates for further stimulus or an extension. Therefore, the Euro turned around and tumbled to a new low.
The same scenario happened for equities. No discussion of extending led to a notable decline in DAX and other European equities, but they recovered and added new gains when Mario said that they have not discussed QE tapering.
What Do We Know?
The short answer is NOTHING. There is nothing new with the ECB’s policy. Nothing has changed yet, at least until December. That is what we are able to understand from the ECB chairman. However, from now until December, there are many events and economic figures which are likely to give us some clues regarding December. This includes the US elections, inflation and the growth data in Europe.
We can suspect one possible scenario in December meeting. If the economic releases were better than expected, and inflation kept on growing, the ECB might announce that QE is likely to end in March, but at the same time, the ECB may extend QE with a smaller amount. This means that tapering may start in March of next year. By then, it would be an extension with tapering. Such decision would be positive for the Euro and negative for equities.