ECB Rate decision and Press Conference drive wild volatility

Ok, I had to finish watching Draghi's Press conference to see if any surprises came out and a few did as you can probably see in the market or if you followed pre-market and currency activity.


First of all, the ECB cut rates by 25 basis points which was expected and priced in to the market, although many participants hoped they would cut by 50 basis points, this brings the rate to 1%.


In addition, the interest rate on the marginal lending facility will be decreased by 25 basis points to 1.75%, combined with a decrease for the interest rate on the deposit facility by 25 basis points to 0.25%.


In essence, stronger banks have been parking excess money at the ECB as a safe haven storage and received .50% interest, while that same money was lent by the ECB through the marginal lending facility to weaker banks at a rate of 2%. What the EB appears to be trying to do is make borrowing for the weaker banks a bit cheaper while trying to discourage the stronger banks from depositing money at the ECB where it serves no purpose economically, it is not being lent in overnight transactions to other banks, it is not being loaned out, so they are trying to reverse that situation by making the interest rate paid less attractive, this is in essence to try to help unfreeze the liquidity situation that is getting worse in the EU.


Here's how the market reacted to the 7:45 EDT 25 basis point cut in ES and EUR/USD FX and the subsequent press conference Draghi held.

 ES -Rate cut at the green arrow and the press conference disappointment at the red arrow.

The same for the EUR/$USD, 7:45 cut at the green arrow and the press conference at the red arrow.


Here's what ES/3c looked like.

As I noted last night, ES looked ready to give back some gains from yesterday's late day false rumor from Nikkei about the IMF pledging $600 bb to an EU bailout which was promptly refuted.ES did leak lower slowly through the night, we saw a positive divergence that gained a little traction, but the market was largely unchanged waiting for the ECB announcement.


Here's what disappointed the market in Draghi's press conference:


-"lending money to IMF to buy Euro bonds is not compatible with the treaty"


-that the ECB is not the IMF, and that lending to the IMF would be very complex legally, and ii) that the liquidity situation is comparable to post Lehman


*When the above was mentioned, everything in Europe moved to overnight lows


Furthermore:


-DRAGHI SAYS ECB NON-STANDARD MEASURES ARE TEMPORARY IN NATURE


-ECB SEES 2012 GDP GROWTH OF -0.4% TO 1.0% VS 0.4% TO 2.2%

 

-ECB SEES 2012 INFLATION OF 1.5% TO 2.5% VS 1.2% TO 2.2%

The last two are damning as the ECB says that they see higher inflation and negative growth in GDP or recession, which put together=Stagflation.

Continuing:

-DRAGHI SAYS HE DIDN'T SIGNAL MORE BOND PURCHASES LAST WEEK

-Draghi says, "The Primary mandate of the F__E_D_ is different then the ECB."

As far as other actions taken:

-ECB will ease collateral criteria for loans to banks. Will reduce rating threshold on ABS collateral

Right now sovereign risk is catapulting higher. What Mario Draghi did today is the worst of all possible worlds: on one hand he is allowing more financial risk-taking on the ECB's dime courtesy of increased liquidity and relaxed collateral requirements as well as longer LTROs, on the other he essentially killed any provisional bailout rumors, saying that the ECB will not monetize, nor lend to the IMF. The result: just look at the market right now and since the post cut highs.

Draghi is considered a dove, but as he pointed out, the ECB's mandate is different then the F_E_D's, he is focussed on banks and not sovereigns as is his mandate, the end result, a lot of disappointment in the market.