ECB throws a taper shocker

The ECB has said that it will extend its QE programme out to December next year, however, from April to December asset purchases will be EUR 60 bn per month, EUR 20bn less than the current monthly purchases. This is a shocker, but probably to be expected, after all, the ECB has made sure that its QE programme will easily see it through the EU’s political risk events set for next year and the German elections scheduled for next September.

Was the statement dovish or less dovish than expected? The answer is both… The extension to QE is much longer than we expected, but the tapering announcement is almost hawkish, a mere three days after the Italian’s voted No in its referendum.

The market reaction has been volatile from this taper announcement:

• EURUSD jumped to 1.0874, but at the time of writing is back below 1.08, and is well off the initial spike higher.
• German 10-year sovereign Bund yields are approx. 6 basis points higher, but are also backing off from highs a mere 5 mins after the annoucnment.
• Stocks are a touch weaker.
• Italian banking index is still up over 2%, it actually jumped on the back of the ECB announcement that it would extend QE to Dec next year, which is positive for Italy’s troubled banking sector.

The ECB said that there would be no change to negative interest rates, which is ultimately bad news for banks, but the fact that they have the guts to announce a taper at this stage, may suggest the next step, probably in 2018, is to raise interest rates back above 0%.

The ECB may have pulled off the biggest central bank shock of the year, considering the Fed’s rate hike next week is already 100% priced in by the market.