EURO DROPS AFTER DRAGHI'S BIG MOVE
By SAM RO AND MYLES UDLAND, Business Insider
FinViz
The Euro is near session lows against the U.S. dollar after Mario Draghi's press conference.
A series of surprising and aggressive moves from the European Central Bank today is sending shockwaves through the global financial markets.
The ECB announced three rate cuts, including lowering the main refinancing rate to 0.05% from 0.15%, lowering the marginal lending facility rate to 0.3% from 0.4%, and lowering the deposit facility rate to -0.2% from -0.1%.
ECB President Mario Draghi also announced that the ECB would begin buying bonds, specifically covered bonds and asset-backed securities.
The euro dropped from $1.3160 to a low of $1.2996, its lowest level since July 2013, and was trading right at $1.30 on Thursday morning after the conclusion of ECB president Mario Draghi's press conference.
Stocks in Europe were rally on the news, with markets in France, Italy, and Spain all gaining more than 1%, while the German DAX was up 0.4%.
European bonds were also rallying, with the yield on two-year bonds in Germany and France, among other Euro nations, all falling into negative territory. The yield on 10-year German Bunds, which has been falling sharply through the summer, was also at around 0.95%.
The rate cuts were a surprise to the market, as many believed the ECB was already at the "lower bound" for interest rates. In his press conference on Thursday, however, Draghi made clear that now this is the bottom for rates: "We are at the lower bound."
All of these actions are intended to stimulate growth and boost inflation by keeping credit markets liquid and interest rates very low.
Quantitative Easing?
Draghi announced that the ECB will begin buying asset-backed securities and covered bonds, though Draghi did not specify what the scope of this program would be.
Considering that this program involves the outright purchase of asset-backed securities, it is considered quantitative easing, though Draghi seemed reluctant to attach this moniker to the actions announced Thursday in his press conference.
Draghi said the actions announced Thursday are aimed at "credit easing," and said that a broader asset purchase program was discussed at the ECB meeting, with some members wanting to do more, and others less.
In his press conference, Draghi did, however, make clear that the ECB is willing to expand its balance sheet, specifically saying it is comfortable with the balance sheet returning to 2012 levels.
In a note to clients, Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said:
"It is slightly surprising that this program will also include covered bonds, but it is in line with the likely objective of the ECB to present a program with a size that will meaningfully increase the ECB’s balance sheet, in the absence of sovereign bond purchases. A critical comment was also that the ECB intends 'significantly to stir' the size of its balance sheet, a clear signal that the ECB is now willing actively to expand its balance sheet."
The Eurozone Has Been Failing
GDP growth in the eurozone fell to 0.0% in Q2. And the July and August economic data have suggested a failure to rebound in Q3.
SEE ALSO: MARIO DRAGHI BRINGS OUT THE BIG GUNS: EURO QE IS HERE
