The big surprise for the market was an across the board 10 basis point cut to Main Refinancing Operations, now at 0.05%, the Marginal Lending Facility to .30% and the Deposit Facility (money parked at the ECB by banks) from a negative 0.19% to a negative 0.20%.
Also the ECB said they'd be purchasing Covered Bonds.
ABS are Asset Backed Securities, the ECB will be buying "Private Sector" , non-financial ABS, meaning things like car loan debt that is packaged, credit card debt, etc, but all private sector. I believe mortgages will also be bought, but if I understood the press conference correctly, only existing tranches of bundled mortgages, not new ones which I suspect is to avoid a housing bubble. The details are still being worked out and will be announced at the October ECB meeting.
Covered Bonds are a lot like ABS, they are backed by an income stream such as mortgage payments or a pool of assets, traditionally these stay on the originator's balance sheet, but details are forthcoming with regards to whose balance sheet these will be on. They essentially are ABS with the ability to have recourse in case of any kind of originator insolvency so these are considered to be high quality assets, none are financial assets, meaning all are private credit.
Apparently combined with the lower refinancing rate and lending rate the ECB is trying to stir new credit creation to businesses and individuals to encourage spending as there has been a deflationary problem in the EU for some time now. Also cutting the deposit rate from -.10 to -.20 discourages banks from parking money at the ECB and theoretically putting it to work in creating more credit.
JPM expects the program to be worth approx. $40bn Euros although I've heard $500 bn Euros. details are to be given at the October ECB meeting.
The ECB did not engage in QE as we know it, they are prohibited by the EU's charter to finance any member nation's debt so buying bonds like the F_E_D's QE would have been a legal nightmare that Germany doesn't support and would require a change to the EU/ECB's charter. Also the assets being purchased are all private sectors, (Car loans, credit card debt, etc.) with the aim of stirring new credit creation to the private sector, new consumer spending and stemming the deflationary tide.
When the F_E_D first engaged in QE 1 late 2008, they did so by buying MBS, Mortgage Backed Securities, this did absolutely nothing for the market, it wasn't until 2009 when the F_E_D added treasuries to the mix that the market took off.
We really don't know much more than that at present until details are released next month at the next ECB meeting.
Still there are many questions outside of the details as to how effective the ECB's actions can be. During Draghi's Press conference, multiple references were made to structural reforms, there's nothing that would create an initiative toward structural reforms that are badly needed. There's no fixes for fiscal issues for member nations which was talked about as needed reforms to work with monetary policy. The competitive disadvantages between France and Germany will remain as this too is outside the ECB's purview. And the obvious question is, "If a negative -.10% deposit rate with the ECB didn't spark lending, why would a 0.20% rate do anything more?
MAny have surmised that the low sovereign EU member nation bond yields was a sort of front running an expected all out QE, sovereign bond purchase program. For instance, The yield on the Spanish 10-Year bond is now 2.16%, down from 4.51% a year ago. The yield on the Italian 10-year bond is now 2.35%, down from 4.42% a year ago. The Yield on the Portuguese 10-year bond is now 3.15%, down from 6.77% a year ago. It would seem bond traders were front running the ECB, but Draghi has been fairly consistent in not going there, so perhaps there's something else at work, we'll know soon as we watch sovereign bond yields.
The immediate effect was for the strong EUR/USD short trade to move even lower, over 100 basis points and under 1.30, they did move back above $1.30 shortly after the announcement, but now sit lower at 1.2937, about a 200 pip drop thus far today. To give you some idea of the size of the move, this 4 hour chart reaches back to February 2014...
This in turn sent the $USD significantly higher , to 14 month highs, which had the effect of sending everything else lower. We've talked a lot about this in recent weeks, whether the Legacy Arbitrage correlation was back as perhaps the "New Normal" isn't actually here to stay (as we know it's not). All of the usual suspects in the $USD Legacy Arbitrage were lower, gold, silver, oil, and even stocks. To give you some idea of the size of the $USD move today, here's the same 4 hour chart reaching back to Feb. 2014.
All of the averages were marginally lower except the Russell 2000 down 0.45% and of course Transports, up +.62% on some negative divergences and likely lower oil prices which looked like a nice opportunity to slip in to transports and fill out that position.
However, today had a weaker feel than usual even considering where we are in the cycle. While the SPX loss was only -.15% and of course didn't hold $2000, this intraday chart of the last several days shows the nearly trendless market breaking the only trend there had been.
along those lines I posted several times Credit's plunge, Broad Market / Credit Update... VERY UGLY, and from the last month we know how strong the leadership correlation of credit has been which is why it is said, "Credit leads, stocks follow.
Not only did our Leading Indicator (HYG) suffer sharp declines on its way to a lower low as it has entered stage 4 / decline as posted yesterday, but the less manipulated HY Credit which has been selling off all week was hit extra hard today...
In addition to that, this was not mere $USD legacy arbitrage correlation (back after over 5 years of being replaces by QE and carry trades as we have speculated we'd see for the last week) as there's no reason for intraday breadth to be so bad as it was, More Ugliness as NYSE intraday TICK (market breadth) hit -1858, I honestly don't recall the last time we saw such a deep disparity between stocks on the uptick and down tick.
The S&P closed at 5-day lows and lost 2000 , even as the late day effort to regain SPX 2000 or at least ES/VWAP failed.
Something just felt much weaker today, although I'd call it a gut feeling it was rooted in charts such as HYG, intraday TICK, the loss of gap highs the last several days, the inability for HYG to put in a short term divergence that will hold and some very fast moving divergences above and beyond what we've expected and have already seen for the stage we are in with this cycle (late stage 3).
Some of the scariest moves today where were I didn't even think to look on an intraday basis, for example I showed this QQQ 5 min chart earlier today in Broad Market / Credit Update... VERY UGLY
As for Gold and GDX, we'll take a look at them, I suppose the $USD will have influence, but don't forget the NUGT position we sold on the breakout day at a +50% position gain on a +2.61% breakout day on 7/9, expecting a pullback in to GDX's year-plus base where we'd enter new positions on what I believe has the potential to be a long term bull market in gold miners. We waited a while for the pullback that never materialized as GDX/NUGT just chopped sideways around the breakout/neckline.
It's hard to say whether this is the pullback finally making its way as was expected as the day was quite nasty, longer term I'd welcome the pullback, shorter term though I'd like to unload NUGT on any strength if this is indeed more than the $USD Legacy Arbitrage Correlation as Gold and GDX share a tight correlation.
Here from the GDX (green) correlation with gold (red), it appears that it is the pullback we were looking for since exiting the last NUGT long at a +40 and +50% gain.
Unlike the Dominant Price/Volume Relationships that have been very accurate for next day moves, I think yesterday's was probably pointless and there is absolutely no Dominant Price/Volume Relationship today which is a little surprising.
Four of nine S&P Sectors closed marginally green with Consumer Discretionary leading at +0.38% and Energy lagging at -1.35%.
Of the 239 Morningstar Industry/Sub-Industry groups, 97 of 239 closed green.
As for market breadth, most A/D lines came in weaker than the correlation with their average, however the big news in breadth after 10 days of gaining at the start of the rally and 11 days of being totally flat as shown last night and the night before...
Today we say several of the major breadth indicators start to roll over including the Percent of NYSE stocks > their 200 day average, rolling to the downside, also "Percent NYSE stocks > than their 40-day moving average" and the 1 and 2 standard deviations above the 40 and 200 day moving averages.
In other words, July 31st on a 2% decline in the SPX we called for a bottom, base and oversold rally based on breadth, it corrected out of oversold and stalled like HYG as it entered stage 3 (top) and remained there 11 days (not too much different than HYG), today (like HYG), they are rolling over to the negative to 14-day lows.
Tomorrow will be a big day with Non-Farm Payrolls for August reporting at 8:30, otherwise it's a relatively quiet economic day with 2 F_E_D speakers also scheduled.
As mentioned earlier today, the daily candlesticks did nothing to interfere with yesterday's bearish engulfing candles, in most cases today's action just enhanced the bearish reversal candle, for example like shown last night,
Sentiment alone (Investors Intelligence Bull/Bear Ratio) alone argues for a rather sharp decline with bearish sentiment at 1987 lows. When Icahn, Druckenmiller, Zell and Soros are preparing for the downside fallout, I suspect it's more than a market correction.
Just as a reminder of the big picture as it's easy to get lost in the lines watching every tick of the market every day...
As mentioned earlier today, at some point top-ticking the market has to be weighed against missing the move completely, or at least the first momentum burst.
