“Helicopter Draghi” Disappoints – Gold Rises, Euro Surges, Stocks and Bonds Battered Globally

‘Super Mario’, the European Central Bank’s monetary magician, disappointed markets yesterday as continuing and unprecedented monetary easing failed to prevent a sharp sell-off in stock and bond markets which has continued today.

There are sharp losses on financial markets after the ECB’s President’s – nicknamed ‘Super Mario’ and more recently ‘Magic Mario’ – latest radical measures stopped well short of market expectations and traders desperation for more cheap money and deepening ultra loose monetary policies.

Draghi announced a deepening of probably the most radical monetary policies of any major central bank in history.

The ECB will extend its massive 60 billion euro ($63.5 billion) a month money printing, or debt monetisation, scheme to at least March 2017, an additional six months. Debt monetisation will now include both regional and local government debt and be reinvested upon maturity.

The ECB cut its deposit rate to a historic low and further into negative territory by 10 basis points to a fresh low of negative -0.3 percent, down from -0.2 percent. The cut means banks in effect must pay more for the ECB to hold their money. The ECB kept its main refinancing rate (or the price that banks pay to borrow funds from the ECB) unchanged at an unprecedented, essentially 0 percent – exactly 0.05 percent.

While stocks and bonds fell, gold rose and the euro surged 3% against the dollar. Disappointment rattled stock markets on both sides of the Atlantic, with many European indices suffering their worst day since the chaotic August 24 rout.  The benchmark S&P 500 fell into negative territory for the year again.

Gold bullion prices rose 0.8% in dollar terms – the biggest one day rise in two weeks – after the ECB announcement. Although gold is being oversold it was due a bounce. Gold in euro terms fell 2.3% and is now marginally lower for the year to date – down 0.7% year to date to €978 per ounce  – see table.

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Bond markets sold off very sharply yesterday. The benchmark 10-year bond yields of Germany, France, Italy, Spain, Portugal and the Netherlands all jumped by more than 20 basis points.  Even the US Treasury market took a battering with the 10-year Treasury yield jumping 15 basis points to 2.38 percent — its biggest one-day rise in over two years.

“The value of the U.S. fixed-income market slid by $162.5 billion on Thursday while the euro area’s shrank by the equivalent of $107.5 billion” according to Bloomberg.

Many analysts noted that the stock and bond market routs reflected the fact that speculators had bet too heavily on a further aggressive expansion of QE and money printing by the ECB. Risk assets are now extremely dependent on the drug that is ultra loose monetary policies, which does not bode well for their outlook in 2016 and the coming years.

The ECB has made it clear that its ultra loose and extremely “accommodative” policies can be expected to continue for some time to come which will be supportive of gold in euro terms at these depressed levels.

The continuation of the ECB’s and other major central banks radical monetary experiment shows how vulnerable  our economies are and how they remain very exposed to shocks in the Eurozone and indeed from outside shocks.

Significant global macroeconomic and geopolitical risks remain and may scupper the vulnerable Eurozone economy and indeed the global economy underlining the need for conservative asset allocation and safe haven assets.

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DAILY PRICES
Today’s Gold Prices: USD 1063.00, EUR 977.56 and GBP 702.60 per ounce.
Yesterday’s Gold Prices: USD 1050.60, EUR 994.75 and GBP 703.13 per ounce.
(LBMA AM)

Gold in EUR – 1 Year

Gold made a significant jump yesterday, closing up $10.50 to close at $1063.20.  Silver also gained slightly by $0.08 to $14.11 at the end of day. Platinum regained some of its recent losses to close up $16 to $844.

Gold in euro terms fell over 2% – see above.  Silver, underperformed gold during yesterday’s bounce but was also higher and has eked out further gains today. Platinum, and palladium are marginally higher today.

IMPORTANT NEWS

Gold holds above 2010 lows ahead of U.S. jobs data – Reuters
Gold Heads for First Weekly Gain Since October as U.S. Jobs Eyed – Bloomberg
Gold Futures Rebound From Five-Year Low After ECB Rate Cut – Bloomberg
Gold rebounds from 2010 lows after ECB rate decision – Reuters
India targets temple gold hoard to rescue monetisation plan – Reuters

IMPORTANT ANALYSIS

Mario Draghi riles Germany with QE overkill – The Telegraph
Draghi Braves QE Hype With Boost That Leaves ECB Room to Do More – Bloomberg
How might the next big market crash unfold? – MoneyWeek
Greece is back at the heart of EU’s existential crisis with threatened expulsion from Schengen – The Telegraph
Why The US Mint Has Sold Out of Silver Coins – Casey Research

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