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What a difference a QE programme makes

Financial Events
By Paul Hodges on 02-Mar-2015

Index Mar15 “What a difference a day makes
Twenty-four little hours
Brought the sun and the flowers
                                           Where there used to be rain” (lyrics, Renee Olstead)

What would financial markets do without Mario Draghi, the head of the European Central Bank (ECB)?  A month ago, they were worrying about deflation arriving in the Eurozone and the US, China’s slowdown, and the steady rise of the dollar – which is draining liquidity from global markets.

Then Mr Draghi announced he would hand out €60bn/month ($67bn) of free cash to any financial institution with a European bank account. And suddenly, he “brought the sun and the flowers where there used to be rain”.

As a result of his new Quantitative Easing (QE) programme, an amazing transformation has taken place in the Boom/Gloom Index, which measures sentiment in financial markets, as the chart shows;

  • The Index, which had been headed downwards, suddenly recovered and jumped to an all-time high (blue column)
  • The world’s major stock index, the S&P 500, also reversed its decline and hit a new record high (red line)

This, of course, has had a good side.  One unintentional consequence has been that oil prices have temporarily stabilised.  All those companies who had bought raw materials in Q4 at the oil equivalent price of $80/bbl or higher, have now been able to quickly unload them to customers before prices fall again.

This is really very good news.  Some of the inventory backlog has now been cleared.  Smart companies, who took the opportunity of the bounce to sell, can start again.

The real problem, of course, is that Mr Draghi’s announcement just confirms that we are in the end-game of the stimulus policy.  This new QE programme won’t turn today’s deflation into inflation.  Or cause China to abandon its New Normal policies, or stop the dollar rising.

Crucially, this is because no amount of money-printing can turn today’s ageing European population back into high-spending 30 year-olds.  Instead, it will simply create new debt to add to the existing mountain of unrepayable debt, as I will discuss tomorrow.

But in the meantime, we can sit back and watch in amazement.  As the Financial Times commented on Friday:

“Markets have entered a sort of Wonderland this year in which up is down and black is white. Negative bond yields, an anomaly some traders say they never expected to see in their lifetime, have spread across Europe, offering investors a guaranteed loss on their money if they hold a bond to maturity.”


My weekly round-up of Benchmark prices since the Great Unwinding began is below, with ICIS pricing comments:
Benzene Europe, down 59%. “Sluggish derivative demand and limited export opportunities have also weighed down on any potential pricing upturn”
Brent crude oil, down 43%
PTA China, down 41%. “Majority of market participants were just returning from their Lunar New Year festive holiday.”
Naphtha Europe, down 38%. “supply is balanced to long in the north and tight in the Mediterranean due to strong fundamentals and ongoing weather-related delays
¥:$, down 17%
HDPE US export, down 27%. “Domestic export prices held steady during the week.”
S&P 500 stock market index, up 8%