8 December 2016 (7:45 AM)
The European Central Bank has left its interest rates unchanged at 0.00%. As was widely expected, the central bank has also extended its bond purchase program (QE) till December 2017, which was to end in March next year.
However, the ECB has announced that it will reduce the size of its QE from April next year. This step is being seen as the start of QE tapering from the ECB. The Federal Reserve has already been withdrawing its free liquidity provisions through its own asset purchase program and has already embarked on a path of raising its interest rates.
The decision of tapering from the ECB is a bolt from the blue for stock markets, that has been expecting extended QE from the central banks.
But the liquidity junkie speculators in markets fail to realize that big central banks cannot go on feeding them free liquidity for ever. Especially when populist governments are being voted out of power in Europe and Trump administration is getting ready to tackle the Fed in the U.S.
Latest: The ECB has extended its QE program till Dec 2017, but downsizes the amount of asset purchase!
This means, the central bank has started tapering its QE like the Fed. Interesting and disappointing for markets.
In essence, markets were clamoring for extend supply of their free liquidity cake. The ECB agreed but cut down the size of that cake!
Markets Reaction: U.S. stock futures and European markets are swinging between up and down as traders, investors try to figure out if the ECB has delivered a cake or taken away what was being given earlier 🙂
The Dollar index has trimmed its earlier losses. Gold has fallen. Euro is coming down after striking up. Only U.S. bond yields are tracking steadily in one directions, upwards. Higher yields mean central banks are cutting down on freebies and bond markets are certain that the Fed will also do the same next week by hiking its rates.
Remember, all this will remain volatile for next one hour at least and we will see lots of ups and downs and reversal in all segments of markets.
The Guardian (U.K.) is calling these steps a “dovish tapering” from the ECB. Perfectly said. Unfortunately, markets were not expecting this anti-climax.
The European Central Bank has left its interest rates unchanged, U.S. stock futures turned negative !
U.S. Bond yields zoom up (negative for stocks).
Markets are hoping for more stimulus/ extension of current QE program from the central bank. In 40 minutes from now, the ECB chief Mario Draghi will address a press conference. Expect volatile action in markets till that event is over.