Don’t blame us – you’re the ones to blame for getting over-excited.
That’s the message from the European Central Bank to financial markets Friday, a day after its relatively modest latest stimulus package led to one of the sharpest sell-offs in years.
“We have to recognize that the markets got it wrong in forming their expectations,” ECB vice-president Vitor Manuel Constancio told CNBC. “They did indeed have higher expectations than were there and that’s why they reacted like they reacted but that was not our intention.”
The dollar has lost over three cents against the euro since the ECB announced its measures (a slim 0.1% cut in its discount rate and some tweaking to its bond-buying program that will have no immediate impact). European government bonds have also sold off sharply and stocks stayed under pressure for a second straight day, with the German DAX index losing 1% and the French CAC-40 0.7% by lunchtime in Europe.
“We feel deflated,” Bank of America Merrill Lynch analysts wrote in a morning note to clients.
ECB President Mario Draghi was roundly panned by wrong-footed analysts after his press conference, where he failed to turn the mood round. Draghi has been the markets’ darling since taking over at the top of the ECB in 2011, facing down opposition from the bank’s conservative German members to force through an unprecedentedly loose monetary policy that has driven bond prices to record highs. That has generated big profits for Eurozone banks, even though the margins on their lending business have withered due to the ECB’s low interest rates.
Constancio said Friday he believed the “fault lies with the markets,” and he rejected the view that the episode had cost the ECB hard-won credibility. In the weeks leading up to the meeting, Draghi had talked of the need to get inflation back up to its targeted level of just under 2% “as quickly as possible,” prompting widespread expectations of an increase in bond purchases–which then failed to materialize.
“Perhaps many (market participants) were hoping to, you, know, make some money if there would be a big event,” Constancio went on. “But, indeed they got it wrong.”
The analyst community, however, was in no mood to take that lying down.
“It’s tempting to blame markets for getting ahead of reality, but it does feel to us that the ECB have made communication errors in the last month or so that led to us all expecting much more,” said Deutsche Bank strategist Jim Reid. “Not only did they disappoint but they gave no indication that they were on the brink of doing more in Q1.”