Prediction: European Central Bank leader Mario Draghi is going to disappoint people tomorrow. We just don’t know who they will be.
Tomorrow’s ECB action will be a huge media event, much like last year‘s Federal Reserve meetings. Ben Bernanke kept us all in suspense for months over the “taper“ decision, and then most Fed news went back to being routine and unexciting.
The same may happen tomorrow …
Most of Europe is still stuck in recession, or at least close to it. The ECB is the central bank for countries in the euro currency system. The U.K. doesn’t use the euro — but Germany, France, Spain, Italy, Greece, and others do. Draghi is their version of Janet Yellen or Ben Bernanke.
As far as I can tell, most Europeans want Draghi to “do something“ that stimulates economic growth.That’s where the agreement ends. Many Germans worry about inflation, while Greeks want more inflation.
Draghi can’t please everyone. So what will he do?
The expectation as of this afternoon is that the ECB will cut its “deposit rate,” which is the amount of interest it pays for reserves that European banks must deposit with the ECB. That rate has been 0% since July 2012.
How do you cut rates below zero? Draghi is probably about to show us exactly how.
If the deposit rate goes to -0.1% or -0.15%, banks will have to start paying the ECB for the privilege of complying with laws that make them deposit money there. The theory is that discouraging banks from holding cash at the ECB will make them increase lending to people and businesses, thereby stimulating growth.
I don’t believe it will work that way. Loan rates in Europe are already over 5%. If the spread between 0% and 5% isn’t enough to make banks start lending, another 0.1% won’t make much difference.
So why go to the trouble? Draghi and his colleagues may think the psychological jolt of negative interest rates will have some kind of positive impact. They’re also trying to discourage foreign capital from entering Europe and making the euro currency stronger.
It’s also possible the ECB will launch an asset purchase program, similar to the Fed’s quantitative easing policy. We don’t know what assets they would buy, or whether a European QE will work any better than QE did over here.
Some of our analysts are on the other side of that opinion. In fact, my colleague Geoff Garbacz made a bet today: a bottle of Chilean Malbec wine if the ECB does asset purchases.
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Bond traders already presume the ECB will pull the negative interest rate trigger. Markets have “priced in“ that change, so reaction will be minor if that’s all we get.
All bets are off if Draghi surprises the markets with a Euro QE or other new schemes. The news will break in the morning hours for Americans, so our markets could get crazy.
Warning: If you’re planning any portfolio changes, tomorrow is probably not a good day to implement them. Friday may not be, either, if the U.S. jobs report contains any big surprises.
Even if you aren’t trading anything directly exposed to Europe, events like this one can create gyrations for everyone.
If you’re not a professional trader, the best move is to watch from the sidelines. The near-term forecast will be a lot clearer once these two events are behind us.
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Speaking of Europe, President Obama is over there right now. Today in Warsaw he met with Ukrainian president-elect Petro Poroshenko.
From there, Obama went to Brussels for a meeting with the former G-8 group, which is now down to G-7 with Vladimir Putin’s ejection. Putin was originally supposed to host this meeting in Sochi, Russia.
Obama and Putin will still cross paths when both attend a ceremony Friday marking the 70th anniversary of the Allied invasion at Normandy. According to press reports, Putin’s schedule includes private meetings with French president Francoise Hollande, German chancellor Angela Merkel, and British PM David Cameron.
No Obama-Putin meeting shows up on any schedule I’ve seen — but they will both be inside the same big French chateau for several hours. Maybe something will happen once the cameras are off. They certainly have plenty to discuss.
