The market somehow didn't appreciate Draghi expressing his belief that there was no longer a requirement to lower interest rates further, implying participants shouldn't expect additional measures to be put in place anytime soon. Considering the wave of stimulus the ECB added to existing measures, its understandable why such a statement like that was made yet it still didn't give the market impetus to set forth on a rally.
Perhaps the bleak economic forecasts made during yesterday's announcement gave a heads up to investors that the central bank didn't expect an improvement soon and it was implicitly introducing additional measures to avoid calamity. The sentiment shown during the ECB press conference exudes an incurring fear that maybe central bankers don't have control over the direction of the economy and negative interest rates spell disaster.
So no matter what course of action is taken the market will use such an event to sell off exposure instead of creating euphoric rallies that last for months on end. This was clearly evident a few weeks back when the Bank of Japan lowered interest rates to below zero for the first time in its history. Again the first reaction to this was positive as has been the case when stimulus is announced but then the market had second thoughts and dragged global markets lower.
What we witnessing here is a clear indication by markets that they no longer trust central bank's' ability to steer their economies in the right direction, partly the reason we've seen an amazing winning streak in gold lately but more importantly why stock markets around the world have taken a backseat while the focus has shifted to bonds.
I have said it in the past and will continue to emphasis the point that negative interest rates don't mend a broken economy. What is needed is structural reform from government's but this is becoming harder to come by as is becoming evident in the ECB decision to expand its instruments in use to corporate bonds due to the insufficient quantity available in EU government bonds. European governments have mounted up hordes of debt piles that has not only caused distress amongst credit rating agencies but severe austerity measures in place needed to cut back on the payment burden and shrinking tax base.
With government's forced to implement a contractionary fiscal policy which is in direct contrast to the expansive monetary policy set by the ECB you find defeating ends in the sense that one cancels the other out that looks to keep the EU locked in a mess for some time to come.
It's clear that policymakers have plunged worldwide markets into disarray following the waves of stimulus introduced after the onset of the Financial Crisis. What isn't certain at this point is how they are going to reverse the adverse impacts these effects are having on the sentiment of market participants and economies alike that could send an even bigger shock through the financial system than we saw in 2008. All I can say is fasten your seatbelts, we're in for a bumpy ride...
Mario Draghi throws the kitchen sink at Europe’s economic distress. Again. https://t.co/E4c0iXiwl7 pic.twitter.com/fQAjP0MwW7— NYT Business (@nytimesbusiness) March 11, 2016
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