{"id":11725,"date":"2015-01-24T13:33:31","date_gmt":"2015-01-24T17:33:31","guid":{"rendered":"http:\/\/www.pgm-blog.com\/?p=11725"},"modified":"2015-01-24T13:33:31","modified_gmt":"2015-01-24T17:33:31","slug":"the-ecb-bazooka-of-january-22nd-2015","status":"publish","type":"post","link":"https:\/\/www.pgmcapital.com\/nl\/the-ecb-bazooka-of-january-22nd-2015\/","title":{"rendered":"The ECB Bazooka of January 22nd, 2015"},"content":{"rendered":"

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Dear\u00a0PGM Capital\u00a0<\/strong>Blog readers,
\nOn Thursday, January 22nd, the “European Central Bank<\/a>“<\/strong>\u00a0(ECB) \u2018took out the bazooka\u2019 with bigger than expected QE stimulus package.<\/p>\n

The ECB chairman, Mr. Draghi, said the ECB would buy a total of \u20ac60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.<\/p>\n

The purchases of government bonds and those issued by European institutions such as the European Investment Bank will start in March and are intended to run through to September 2016. Mr. Draghi signaled the purchases could extend further if the ECB isn\u2019t meeting its inflation target of just below 2%.<\/p>\n

As can be seen from below 5-day chart, the Euro fell on the news against most world currencies; like the US-Dollar, Swiss Frank and British pound.<\/p>\n

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Euro – USD 5-day chart -Week January 19 – 23, 2015-<\/p><\/div>\n

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Euro – CHF 5-day chart -Week January 19 – 23, 2015-<\/p><\/div>\n

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Euro – GBP 5-day chart -Week January 19 – 23, 2015-<\/p><\/div>\n

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MARKETS REACTION:<\/span>
\n<\/strong>The ECB decision roiled markets around the world.<\/p>\n

Greek shares led European stock markets higher ahead of Sunday\u2019s elections, while the euro slid to an 11-year low against the dollar, in the wake of the European Central Bank\u2019s decision to unleash a huge bond-buying program.<\/p>\n

Stock and bond markets around the world were given a shot in the arm by the ECB\u2019s bigger than expected \u20ac1.1tn quantitative easing round to fight deflation and revive the ailing euro zone economy.<\/p>\n

European shares are heading for their best week in three years.<\/p>\n

As can seen in below chart, the German DAX and Dutch AEX, respectively the world’s second and fourth biggest exporters, rose sharply on the news for which the German DAX rose for the week with 436 points<\/strong><\/span> or 4.27 percent<\/strong><\/span> to an all time high of 10,649.58 points<\/strong><\/span>.<\/p>\n

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Dutch AEX: 5-day chart -Week January 19 – 23, 2015-<\/p><\/div>\n

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German DAX: 5-day chart -Week January 19 – 23, 2015-<\/p><\/div>\n

PRECIOUS METALS REACTION:
\n<\/strong><\/span>Gold and silver which are the ultimate hedge against inflation rose sharply on the news.<\/p>\n

Spot gold, rose after Draghi’s announcement, to the highest since Aug. 15 at US$1,306.20 an ounce. At 2:54 p.m. EST (1954 GMT) it was up 0.8 percent at $1,303.50.<\/p>\n

Priced in Euros, the price of Gold has risen with approx. 18 percent since January 1st this year as can be seen from below 30-day chart.<\/p>\n

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Silver, nicknamed as poor-man’s gold, did even better! Priced in Euros, the price of Silver has risen with approx. 20 percent since the beginning of this year, as can be seen from below chart.<\/p>\n

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Measured in US-Dollars, Gold and Silver appreciated in the first 3 weeks of January 2015, with respectively 9.5% and 17% as can be seen from below charts.<\/p>\n

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PGM CAPITAL COMMENTS:
\n<\/strong><\/span>With Thursday\u2019s move, which was more aggressive than financial markets had expected, Mr. Draghi passed the baton to governments to take the lead in restoring prosperity to the region\u2019s economy.<\/p>\n

Some business leaders shared the ECB chief\u2019s assessment. \u201cWe have seen QE in the U.S. and Japan, but the key is structural reform. Without that it may not work and I see little sign (of structural reform) in key countries like France and Italy,\u201d said Sir Martin Sorrell, chief executive of multinational advertising firm WPP.<\/p>\n

The ECB\u2019s move \u201cwas positive and it was needed,\u201d said Francisco Gonz\u00e1lez, chairman of Spanish bank BBVA. He praised the slightly-larger-than-expected size of the ECB\u2019s announced operation. \u201cHaving said that, governments have to keep with reforms for the plan to meet its purpose,\u201d he said.<\/p>\n

In a nod to concerns in healthier euro countries over the prospect of assuming risks tied to their neighbours\u2019 debts, the ECB said government bonds will be mostly purchased by national central banks and excluded from potential loss sharing. Credit risks associated with the bonds of European Union institutions will be shared, however, \u201cWe are not in a one-country setup,\u201d Mr. Draghi said.<\/p>\n

Based on this statement and below table we can conclude that purchases of German, French and Italian debts will make up most of the announced ECB QE program as announced last Thursday January 22nd 2015.<\/p>\n

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The above table shows that the ECB plan is complicating 19 nation bond markets, with varying degrees of risks.<\/p>\n

The lessons we should have learned from the SWISS Bazooka of last week and the ECB Bazooka of this week are the following;<\/p>\n

In a world dominated by currency war, Stimulus and Quantitative Easing programs by Central banks:<\/p>\n