This morning European Central Bank executive board member Benoit Coeure has told us that in terms of Quantitative Easing that “the heat is on” to quote Glen Frey. From Reuters.
Coeure said in a speech in Paris that the ECB had bought 9.8 billion euros worth of assets in three days and that the average maturity of the bonds bought was 9 years. The central bank had had no problems in finding bonds to buy, he added.
So they are proceeding at pace and are buying bonds of a longer maturity on average than when they had the Securities Markets Programme or SMP. There was a time when 9.8 billion Euros seemed a vast sum of money but now it does not feel like it does it?! We have changed in the meantime at least in regard to central bank numbers.
Also Mr. Couere told us that it was very important that the ECB made it as easy as possible for banks and hedge funds to make large profits out of this.
European Central Bank executive board member Benoit Coeure said on Thursday the ECB wants to be predictable and regular with its quantitative easing policy.
We can’t have those highly paid traders having to work for their money can we? The banks and indeed the financial sector look ever more like “The Precious” from The Lord of the Rings. Indeed almost any holder of Euro area bonds is sitting on large profits which are being driven by their taxpayers via their central bank. I have pointed out before that there is enormous mispricing here and it is being driven by those whose job it is to stop market-rigging! As to malpractice well with the carrot of 1.14 trillion Euros and the knowledge that Bank of England auctions from the past need investigation there are grounds for genuine fears i think.
On a more technical note you may have spotted that he pointed out that the ECB had so far had no trouble in finding bonds to buy. Someone please explain to him the difference between 9.8 billion and 1.14 trillion! Or perhaps he could find a job that does not involve understanding numbers.
France turns Japanese
I will discuss other changes later but the most symbolic one today is that the French ten-year bond yield is 0.41% which is the same as that in Japan’s government bond market. I will let The Vapors take this one up.
I’m turning Japanese
I think I’m turning Japanese
I really think so
This has been the main player so far in the economic effect of the ECB and its new expanded QE policy. As is the way of these matters nowadays much of the impact came on the expectation of the policy move – did it leak? – but it has fallen since. Overall there was a turn on the 16th of December and since then the trade weighted exchange rate has fallen from 100.6 to 90.1 which in theoretical terms should give the Euro area economy a boost. However there is a rub as I have written in today’s City AM newspaper.
“The Rolling Stones once sung “you can’t always get what you want”, and that summarises the position of the Eurozone right now. I could also have said Bad Timing is appropriate. Because the euro has fallen sharply since mid-December, but so have commodities, and here the euro’s weakness has created some problems. Over the past year, the price of a barrel of Brent crude oil has fallen by 48 per cent, but that has been partly offset by the euro falling 24 per cent against the US dollar. Since oil is priced in dollars, half the gains from lower oil prices have been lost due to euro weakness. There is a similar effect with copper prices, which have fallen by 13 per cent over the past year, but have actually risen in euro terms – due to the fact the currency has weakened nearly twice as much. So while a lower euro is an outright gain in economics textbooks, in practice euro weakness has eroded the gains from lower oil and commodity prices.”
The falling value of the Euro was welcomed by ECB President Mario Draghi yesterday if you translate the central banker language.
the weaker effective exchange rate of the euro – and the impact of our recent monetary policy measures. The latter have had a very substantial impact on what we call “market-based technical financial assumptions”, such as interest rates, exchange rates and stock prices, with the effect being especially large on long-term interest rates.
Oh and when you read about Euro exchange-rate turbulence you may want to note that its average level is 100.21 compared to a starting point of 100. Stability or in ECB speak Stabiliteeee.
What about government bond yields?
These had been falling pretty much ever since the “whatever it takes (to save the Euro)” speech given by Mario Draghi in the summer of 2012. If we continue to use France as an example its ten-year bond yield was 2.8% back then or nearly seven times the current level! It fell below 2% last April and 1% as we moved into December and is now a rather extraordinary 0.41%.
In some ways even more extraordinary is the 0.28% ten-year bond yield of Austria as the news on Heta bank which I discussed on the 2nd of March goes from bad to worse.
@FerroTV FITCH: GERMAN BANKS HAVE LARGE EXPOSURES TO HETA
@PavelRyska Austrian province of Carinthia? going bankrupt and Austria selling bonds at negative yield. Thank you central banks for correcting markets.
What could go wrong?
If we move to longer-dated government bonds we have plenty to consider as both Italy and Spain have seen their 30 year bond yield fall below 2% in the last 24 hours. Even more extraordinary is the fact that the 30 year bond yield in Germany is 0.69%.
What about annuities which are based on such yields?
What about pension funds as in the UK yield falls raised final-salary pension deficits?
Oh and as the ten-year yield in Germany at 0.21% in future when we refer to yield falls in Japan we will have to call it the Germanification of Japanese government bonds! Rather aptly the group Europe put it thus.
The final countdown, oh ho
It’s the final countdown
The final countdown
The final countdown
(The final countdown)
Trouble in little Cyprus
You would not think that it would be a source of much trouble but after the bank haircuts,capital controls and economic distress comes this. From the Financial Mirror.
The House Ethics Committee chairman, Demetris Syllouris, as well as opposition parties AKEL and DIKO, have also demanded the resignation of the entire Central Bank board, including the Governor, two Executive members and five non-executives. Kiliaris is a senior member of DIKO and former Trade Minister
The ECB may regret having the Governor of the central bank of Cyprus answer questions at its last press conference.
The irony of all this is that the Euro area economy was recovering anyway in my view due mostly to lower oil and commodity prices but also to past ECB action. Now it has a lower currency but the gains there will be dissipated by the way that it offsets and in the case of Dr. Copper overrules the price falls seem so far. If lower bond yields and peak stock markets were a solution then many of these countries would have boomed already!
Let me leave you with two thoughts. Firstly due to ECB rules the main beneficiary of ECB QE is Germany which does not need it. Secondly Portugal which is likely to default has a ten-year bond yield of 1.53% whereas the unlikely to default UK has one of 1.77%. Time for a market mispricing enquiry?! The ECB could investigate itself like that Bank of England has had to, what could go wrong with it being investigator,judge and jury?
For those who prefer a visual interpretation here are my views from a webcast I did with Rebecca Harding of Delta Economics.