Who would have thought that the ECB would share a theme song with West Ham United?

Today is a day which the military would call a target rich environment as there is a lot happening. However the major moves are consequences of this being the day after yesterday and in particular yesterday being #ECB #QE day. I would like to take the opportunity ti step back a little and before we come to the eu(ro)phoria of some markets give some perspective on what I think was the most significant statement of all yesterday.

Draghi “We will buy bonds with a negative yield”


Just for clarity I have edited this section as at first I thought the ECB had omitted this from the official transcript but later it was pointed out to me by @LorcanRK so apologies. As well as the  explicit reference there is an implicit one as shown below. From the official transcript.

Draghi: The first question is yes, the maturities range between 2 and 30 years. So it’s very long.

Firstly as it will become relevant in a moment such a maturity range covers nearly everything as most Euro area countries have relatively short average debt maturities. However on the negative yield point many Euro area countries have negative two-year bond yields. Indeed as it is buying by ECB capital key or relative economic size we can see the Germany which has a two-year yield of -0.16% will be 25.6% of all QE purchases and France which has a two-year yield of -0.11% will be 20.1% of all QE purchases.

So good luck with buying 291 billion Euros of Geman bonds and 230 billion Euros of French bonds without buying any with a negative yield…..

To Infinity! And Beyond!

Whilst there did appear to be a size for the programme take a look at this from this morning’s Bloomberg TV interview with the Governor of the Bank of Italy.

“We are open-ended,” Bank of Italy Governor Ignazio Visco said about the European Central Bank’s bond-purchase program. “That is, if we see that there are difficulties in achieving this target that we have, we have to continue.”

Currency Wars

The immediate impact of the ECB announcement was found here as the Euro fell bounced back somewhat and then dropped like a stone especially against the US Dollar where it closed some 2% lower. That particular fall has continued this morning with the Euro registering an eleven year low against the US Dollar as it has fallen into the 1.12s to reach 1.128 as I type this. This has been accompanied by a fall against the UK Pound which also has risen to multi-year highs as it touches 1.32 versus the Euro in spite of itself falling below US $1.50 which used to generate headlines about a sterling crisis on its own.

If we return to a recent fault-line in the Currency War saga then one Euro is now worth less than one Swiss Franc as the exchange-rate is now 0.982. Exactly who or what did the Swiss National Bank think it was doing as it held it at 1.20? Another pillar of central bank credibility has been crumbling to dust.

Also in a minor diversion let me take you to the United States which in is post QE world (at least in major flow terms) is seeing a substantial currency appreciation. The trade-weighted Dollar Index has risen from 80 at the beginning of last July to 94.7 today which is quite a rise especially for those predicting the demise of the US Dollar. Also there is something to mull for those arguing the case that we will soon seer US interest-rate increases.

Bond Mania or Bubble?

I will let readers make their choice as to which of the paragraph heading that they prefer. Euro area bonds fell in the 24 hours preceding the ECB meeting and then rallied after it. But today has seen this. Boom! The futures contract on the bonds of Germany was nearly one point higher earlier today reducing the ten-year yield as low as 0.34% according to MTS. Indeed all maturities up to five-years are at a negative yield in the German bond market.

Whilst German bunds (bonds) are as the Shangri-Las put it “The Leader of the Pack” the others are in hot pursuit. Remember when Fitch downgraded France in early December 2014? Well there is quite a market critique of that in the two-year bond yield that I have already discussed but a ten-year yield of 0.54% pretty much shouts it at their offices!

If we move onto Italy we see that its ten-year bond yield of 1.47% is very close to that of the UK Gilt equivalent. So Italy which will need some form of haircut/default has the same yield as that of the UK? I would say that this is a type of definition of the distortion of markets caused by central bank manipulation except that there are two caveats. Firstly if we go to the five-year maturity then the situation is even worse as believe it or not but Italian bonds have a yield some 0.28% lower. Secondly the picture is muddied by the fact that UK Gilts have also experienced a QE manipulation of some £375 billion.

Back in the day when I worked on the LIFFE futures floor such moves (the German,Italian and indeed Swiss government bonds were traded there then) would be greeted by shouts as highlighted below.

Rally!Rally! No Top!No Top!

Sometimes of course such thoughts are indeed signs of a top but we will have to see.

Of course we also now know that things can go even higher in price terms and lower in yield terms as the ten-year yield in Switzerland has dropped to -0.2%.


For once conventional economic theory is having a decent day. After such an announcement which involves potentially open-ending QE and monetary expansionism then it would predict a falling currency (check) and falling bond yields (check). Of course this is only the first day and so far so good arguments were critiqued in the film The Magnificent Seven by Steve McQueen.

Reminds me of that fella back home who fell off a ten-story building. As he was falling, people on each floor kept hearing him say, “So far, so good.” Heh, so far, so good.

As for the mechanism by which this impacts the real economy they are likely to be weak at best and may even be non-existent. Even worse for the reasons I explained yesterday people may be misled by recovery claims when it fact it is the impact of the oil price fall.

So let me leave you with the new official theme song of the ECB.

I’m forever blowing bubbles,
Pretty bubbles in the air,
They fly so high, nearly reach the sky,
Then like my dreams they fade and die.
Fortune’s always hiding,
I’ve looked everywhere,
I’m forever blowing bubbles,
Pretty bubbles in the air.

If West Ham United had bought the rights to this song they would rise up the football club wealth list like a bullet. After all the ECB is happy to print to pay for things isn’t it?


16 thoughts on “Who would have thought that the ECB would share a theme song with West Ham United?

  1. Hi Shaun I’m just catching up reading your blogs over the last few days and I’m
    saddened by the loss of your father who I know meant so much to you.
    Your blog says it all.Will it work? For all of those unemployed especially the young Europeans I hope so.
    It should surely do some good for the tourist trade in France,Italy etc.

    • Hi Midge and thank you for your kind words.

      As to the QE I agree it would be nice if it worked but the track record of QE so far is not inspiring and in fact is rather disappointing. As to the tourist trade it should get a boost from the falling Euro which was symbolised by the UK Pound £ passing 1.33 and striding towards 1.34. It has been a while since it has touched such rarified heights.

      UK skiers in France and Austria will have much more spending power than those in Switzerland this year.

  2. Hello Shaun,

    We know the impact of QE from BoE , Fed and BoJ . Asset stablelization or inflation

    I didnt think the Euro zone needed that …….

    Still looking for my stimulus check …….. so I can save it 😉

    so when you cut savings rates people save more …… Duh! so QE will have the opposite effect than posted …


    Sit back , enjoy the show , the front seat ? sure ! pass the popcorn it’s going to be a doozy !!

    • Hi Forbin

      I agree that it is in the savings arena where the advocates of #QE were most wrong. I was just in a discussion on twitter about this and reminded everyone of Charlie Bean’s infamous Channel 4 interview back in September 2010 when he said savers had to take the pain. Implied behind that was the incorrect view that they would spend their savings whereas in fact savers have often headed the other way!

      Enjoy your weekend popcorn…

  3. Just a thought…
    Shaun, you have spoken before about the diminishing positive effects of the various QE episodes by the Fed. Ms Yellen and co must also be aware that another round of QE is unlikely to do much, if anything at all, UNLESS… They do a swissie and take the markets completely by surprise.
    All the jaw boning about a raise in interests rates for another few weeks or months and then WHAM! Another few Trillion dollars to support the banks into 2016/17.
    … But like I said, just a thought.

    • It does make you wonder that after 7 years we’re still stuffing money into the grubby hands of the Banks …

      So we still dont know which is bank is bust and which are not ?

      The Great Gordo has a lot to answer for …….


      PS: in 7 years time will we be still not knowing ?

      • Which bank is bust? In today’s messed up financial world, they probably all are since they are so interconnected. But nobody is allowed to actually find out. Thats why we have QE so that they never have to admit that they’ve screwed up so badly that the markets can no longer function properly.

        • Some of us may not live long enough to see the final instalment of the ‘bust banks & QE’ story. After all, if they can keep it up for 7 years they probably think they have found a permanent solution.

          • The Roman Empire started debasing the currency under the Severan Dynasty. It was almost 100 years before the coinage finally became worthless through hyperinflation.

            The U.S. dollar has been devalued and debased for several decades already. Hopefully we don’t have to wait too much longer or Forbin will be getting sick of his popcorn 😋

    • Hi Tim

      One of the so-called exit strategies involves exactly that where official short-term interest-rates are increased accompanied by more QE. Apart from the fact that as an exit strategy it is an oxymoron it further ties us all into the spider’s web. What could go wrong?

  4. Hi Shaun.

    It seems to me that the ECB and the Troika in general could raise the quality of their management considerably if they were to appoint officers of the moral, intellectual and financial probity of Messrs Gold and Sullivan, as honest and decent a couple of old porn barons as one could wish to do business with.

    Currently the Hammers seem to be taking steps in the right direction, which is considerably more than one can say for Super Mario and his band of Merry Muppets.


    • Hi Jim M

      I have replied before that one of my best friends is a Hammer ( and has even managed to convert his son from the clutches of Man Utd to the Hammers) and we have had discussion after discussion over the years along the line of where’s the money gone?

      On another strand my father was a Birmingham City fan where Sullivan and Gold were in situ for some time. Birmingham was run well and it coincided with it returning to the Premiership as well as being vastly preferable to the present mess. So the Hammers are in good hands and I will add that my father often pointed out that they might be mean with players but S&G always got a good manager which is what they have done with Sam Allardyce.

      Oh and I was cheering on your third goal last week as I had Stewart Downing as my fantasy team captain….

  5. This latest ECB move may also develop into a US dollar threat as the $ may become over valued as the Euro falls (I said on MM last year I felt the “true” trading range of the dollar should be $1.50 – $ 1.60 to the £). I fear what Yellen may do if she perceives ECB activities as a $ threat…..

    • Noo 2, That is a good call. The US has been very critical of the EU for not grasping the nettle but we now see significant currency appreciation, I may indeed be able to afford a ski holiday in France after all!

      Yes I reckon you have spotted a player here, the ECB is launching over a trillion, as trading bloc this is not the £375Bn of a minor ex-colonial power. The balance will be upset and other parties will seek redress.

      First SNB upset, then ECB announcement, then currency depreciation, it is looking unstable to me.

      Paul C.

      • Paul you are correct a race to the bottom as I don’t see Yellen shifting on rates anytime soon if ever. Also there will be other unintended outcomes here that have yet to surface.

  6. Who stands to benefit from QE ? The owners of the bonds being bought by QE.

    Draghi’s QE will pay more than the market is prepared to pay. (fraud warning indicators should be flashing RED)

    So who owns most of the bonds ? Investment banks and Pension funds. But the funds are legally required to hold “safe bonds”. With negative yields and Greek elections – bonds look like a certain loss. So pension funds are required to hold loss making stuff in a rigged market. (fraud warning indicators should be flashing RED)

    But the banks are free to sell their bonds to a public entity above fair market value. (fraud warning indicators should be flashing RED)

    gordon damaged middle class pensions. rigged markets, bad regulation, negative yields are going to further reduce middle class retirement income & funding. The UK risks completely destroying it’s private pension system. I wonder how many job losses that would cause ?

    The USA, by comparison tries to keep pension rules consistent. Sure they keep adding complexity, but they do not revoke existing plans. they don’t seem to pull the carpet out under the feet of existing investments.

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