Lofty Expectations: The ECB & LFC

Liquidity Warning

Just as market participants were guilty of getting carried away, in terms of their expectations of the next round of monetary policy measures from the European Central Bank on Thursday, I must admit a similar guilt in being overly exuberant about Liverpool’s title hopes going into the weekend premier league fixtures.

My reaction to the 2-0 defeat to a very poor Newcastle side was not too different from the market reaction to Draghi’s underwhelming announcement – euro spiked from $1.06 to $1.09, ST bond yields jumped c 10bps, and stocks sold off c. 3% – and similar to many traders I imagine, I was left wondering where do we stand now.

To many in the markets, the easy money Italian is their ‘Super Mario’, so I am sure there were questions like, how could he let everyone down? Is he in control of the situation? Speculators of all types were definitely left scratching their heads and the size of the moves across equity, bond and currency markets following the announcement conveyed just how much they were caught off guard.

While Draghi appears to be losing some of his credibility, the holy grail of central banking, there are no doubts over the credibility of Jürgen Klopp, the German now at the helm of Liverpool FC. Losing to the looney toon army is almost as painful as getting a margin call on your short euro position, but it happens.

There is no point dwelling on missed opportunities. As in life, one must simply look for the lessons learned. Klopp will draw his own conclusions on the game and some of his players after careful analysis, but the clear lesson for market participants is not to be complacent when it comes to their faith in central banks.

The timeframe over which we measure success will have a material impact on the outcome. At present, the main characters at the central banks are riding high, but how their experimental policies end still has to play out.

The US Federal Reserve’s expected rate hike next week, and whether they can begin to normalise policy in 2016 without creating significant market dislocation, will provide a glimpse of what lies ahead for a global financial system hooked on easy money.

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