The Inside Story Why The ECB Decided "The Markets Needed To Be Disappointed" And How It All Fell Apart

Tyler Durden's picture

On Wednesday morning, less than 24 hours before the historic, and grossly disappointing ECB announcement, one which sent the EUR soaring the most since the Fed's announcement of QE1, we warned that Mario Draghi may underdeliver, although in doing so he would face the risk of appearing quite weak before the ECB's governing council where in recent months the schism between European doves and hawks has grown to epic proportions.

As MNI noted, "Thursday's meeting will not only be key for the euro area's economic outlook but also decisive for the nature of Draghi's presidency as he starts the second half of his tenure. If he gets his way without sparking a revolt, it hard to conceive a situation in which Draghi won't prevail" to which we add that this is "correct, but the moment ECB decision-making devolves into a pissing contest, Europe has a big problem."

After all if Europe's monetary politics become nothing but a contest of egos, a tragic endgame is all but assured. We concluded by saying that "the question is whether Draghi will listen to logic and reason, or if he will continue his campaign to isolate the Hawks on the ECB governing council and in the process make Europe's monetary situation unfixable. If Draghi does relent, the EURUSD can soar as high as 1.09 tomorrow according to some estimates."

The next day not only was the warning of underdelivery prescient as Draghi did not prevail, but the EURUSD did soar as high as 1.09 as the ECB unveiled a "stunning" package which left Goldman's FX strategist reeling .

But just as we were almost ready to congratulate Draghi on "relenting" and acting rationally, we read a Reuters piece which explains that not only did Draghi not relent from his endless confrontation with the ECB governing council, he actually lost. This is what Reuters just reported:

One source with direct knowledge of the situation interpreted Draghi’s public stance ahead of the meeting as trying to pressure the Governing Council to take bigger action.


"Draghi raised expectations too high, on purpose, and attempted to paint the Governing Council into a corner," the source said. "This was problematic and he was criticized for this by several governors in private."

He failed, and in doing so may have emboldened the Weidmann-led hawks at the ECB whose opposition to Draghi's ultra-easy policies has been duly noted.

How did they win?

Reuters says that "unlike last year, when opponents of quantitative easing made their stance public before the decision, the hawks mostly worked behind the scenes. Opponents worked to curtail proposals coming out of the ECB’s committees that prepared the decisions, ensuring that some of the more radical measures expected by market players never made it onto the table."

The huge market disappointment took place following weeks of public statement by Draghi which convinced traders that the Italian would unleash something short of a neutron bomb, and as a result markets also expected a 25 percent increase in monthly asset purchases and possibly even a deeper rate cut. More radical options under discussion included the purchase of corporate debt or a split deposit rate that would punish banks parking too much cash with the central bank, sources told Reuters earlier.

None of that happened.

Reuters then explains that the smaller than expected move is seen by some as a disappointment for Draghi, who has established a track record for promising and delivering big, as he did with his July 2012 pledge to "do whatever it takes" to preserve the euro and pushing through bigger than expected QE earlier this year.

"Like the Fed earlier this year the ECB has now managed to confuse markets and the public. From now on, markets will treat hints dropped by ECB president Mario Draghi and some of his colleagues with much more scepticism than before," brokerage Berenberg said.

Here, however, is where the narrative breaks:

"the European Central Bank President and his chief economist Peter Praet stoked expectations with dovish speeches in the weeks before the meeting but the ECB’s Governing Council concluded that markets needed to be disappointed this time because the economic outlook has improved and new inflation forecasts were not as bad as feared, the sources said."

Now that, unfortunately, makes zero sense because as we reported, the very next day the US stock market had its biggest one day gain entirely due to Draghi appearance in New York, where he reassured the market that there is no need at all to be disappointed, when he said that "QE there to stay", could be "calibrated" if needed and the ECB can use "further tools" if needed as there is "no limit" to the "size of the ECB's balance sheet."

What happened next was a tremendous surge in the S&P which soared to pre-ECB drop levels, even as the EUR, which is at least in theory the monetary policy transmission mechanism did almost nothing.


Ironically, the market's first reaction was of course correct: yes, Draghi may have resumed his jawboning as the market breathed a sigh of relief, but what will actually happen if the Fed does hike on December 16 without a major increase in ECB liquidity, is that as much as $800 billion in liquidity will be soaked up by the Fed's 25bps rate hike as calculated previously. The impact of a move which is the equivalent of unwinding one and a third of QE2 overnight, will certainly have dramatic consequences on risk prices unless there is a more than offsetting injection of liquidity elsewhere.

Finally, confirming that Reuters' attempt to smooth Draghi's mistake is nothing but an urgently hashed out fiction meant to goalseek the deeply flawed conclusion to a broken narrative, is what Draghi said during yesterday's Q&A.

Recall that as we reported previously, Mervyn King asked Draghi if "today's speech deliberately designed to try offset some of the reaction yesterday?" to which Draghi responsed shockingly honestly: "Not really... well, of course."


Here is what really happened: the ECB tried to engineer a modest market selloff because the "market needed to be disappointed", coupled with a modest rise in the EUR to give the Fed some rate-hike breathing room. Instead, since everyone was positioned exactly the same - wrong - way, the dramatic overreaction in stocks and FX forced Draghi to not only panic but to publicly come out and admit that the only purpose of his Friday speech was to offset the damage from his failure to defeat the opposition at the governing council and to send markets surging. Which they promptly did. 

And while the markets rejoiced at this latest verbal intervention, the question is now that Draghi has challenged the governing council and lost, and furthermore, once again relented to markets, how will the hawks on the council react to any future demands by Draghi to push the S&P even higher? Lastly, if Berenberg is wrong and the ECB has lost a major portion of its credibility, how will Draghi jawbone next time when not even "whatever it takes" is sufficient any more?

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Macchendra's picture

Public opinion needs to be X... where X is our agenda.

knukles's picture

Proves that whatever the intent and whatever the outcome, Mario and Janet do not know what they're doing.

Flatchestynerdette's picture

Knukles - Dow 24000 coming in a blink of the eye by spring time. They keep buying them as if they were 'on sale black friday mark downs' Hedgies gotta make a profit for their peeps

hungrydweller's picture

The bigger the scam, the harder the fall.

El Oregonian's picture

Do you ever get the feeling that you are dreaming, that turns into a nightmare; that we are all stuck in Bizarro-land with a bunch of idiot munchkin leaders, who believe they are just following the papered yellow-brick road home?

Analog's picture

No. Bizarro is much too sane for the unlogical manipulation that is still called a market.

nmewn's picture

Popcorn anyone? ;-)

"On Sunday, December 6th at 8:00PM EST, President Obama will address the nation from the Oval Office about the steps our government is taking to fulfill his highest priority: keeping the American people safe. The President will provide an update on the ongoing investigation into the tragic attack in San Bernardino. The President will also discuss the broader threat of terrorism, including the nature of the threat, how it has evolved, and how we will defeat it. He will reiterate his firm conviction that ISIL will be destroyed and that the United States must draw upon our values – our unwavering commitment to justice, equality and freedom – to prevail over terrorist groups that use violence to advance a destructive ideology."

Phoenix Pilgrim's picture

Interesting conversion of competing terrorist related media. San Bernardino/Obama announcements appear shortly after Putin releases new evidence revealing details of ISIS oil and the "progress" of the allies in preventing transit.

Similar sandwiching of bad news for the jobs reports, housing, markets, etc. So many men behind their curtains to avoid looking at. (Sigh!)  Maybe it would simplify things if we had a seasonal adjustment for the terrorist news.

Pooper Popper's picture

Its to late! The monkeys are here...Run for your LIVES...AAAAHHHHHHHHHHHHHHHHH!!!!!!


I dont care who you are,,,thats some funny shit!

Noplebian's picture
Noplebian (not verified) Macchendra Dec 5, 2015 7:12 PM

When there ain't a loaf of bread left in the shops, this BS will have no meaning or relevance!

Goldilocks's picture

I Believe I Can Fly | FUNNIEST VINES Compilation [HD] Part 29 (1:31)

max2205's picture

That fucker should be in prison sucking OJ's dick 

Yen Cross's picture

    The ECB fucked over a lot of F/X traders Thursday. That 500 pip spike in eur/usd definitely blew up some accounts.  They're just making shit up as they go, and you can see it in the volatility.

hungrydweller's picture

So why fuckin' trade the "market".  Glad those fuckers lost money.. 

Yen Cross's picture

     I agree having a position open in that trade, unless it's a long term macro trade, isn't a good idea. Central banks are reaching a point where they're causing so much market dislocation, that we're going see even more of these batshit crazy reactions on lighter volume.

izzee's picture

Draghi did what he did on Thurs because Janet Yellen was appearing before a Congresssional Economic 10AM that morning.

She could not be faced with questions about the High USD at 105++.  This would have been the case IF Draghi had "delivered" and the Euro crashed 300 pips as Goldman's FX genius had predicted.

Instead, during her "testimony" the USD dropped to the mid 97 handle.

And most of her "questioners" kissed her feet and thanked her for Saving The Economy.  The first question asked after her opening statement was about the Level Of the USD.  The chairman of the JEC said he had expected the USD to be much much higher and was supprised that it went the other way after Draghi's presser.

If you saw that exchange, Janet had a big big smile on her she demured that it suprised her also.   YEH Right.

So the next day Draghi "backed off" and USD/EUR see-sawed a bit higher.

This was not done in a vacuum.  There was consulation.  This was planned. It was a set up to protect Yellen, so she wouldn't get attacked. 


Those privy to it made billions.

Celotex's picture

New ECB liquidity 2 days ago now permits Janet to raise rates to save Fed face. The two actons cancel each other out as money is fungible.

captain-nemo's picture

The question people should be asking themselves are: ‘Who is the marked these days?” A long long time ago the marked was primarily a place where ordinary rich people spent their money by long time investment.  They partly did this by investing in the common future , as personal security and savings as well as helping the economy and industry to tribe and prosper so people could have work to go to every day. The investors put pride into what they did those days, because besides earning even more money, there was also a question of contribution and moral responsibility to help thing grow and make things better.  Governmental institutions like pension funds primarily put their money in the banks those days, earning normal interests.

Today 95% of these people are gone (perhaps even more). They are replaced by large professional hedge funds, large state owned pension funds , large banks and financial organizations and lastly  (but not least) central banks from all over the world. Most of the money today are not invested , and the bourses that they are putting the money into are mostly not for real investment. Instead the bourses has turned into large casinos, where bets are constantly placed by robots (almost at the speed of light). Few of these money are injected into the real economy or placed in projects for future growth and planning needs, instead all the money are just moved around constantly (to and fro) from Bonds, shares, commodities , and currency and so on. 

The bourses today thus mostly act like ‘The jar of Serepta’, where one puts in a dollar and just like magic ‘a hundred’ pops up . It never fails (it cannot fail). It is actually designed and rigged so it cannot fail. It’s the only casino in the world where institutions like this never are allowed to lose money.  


95% of the money that are placed into these Casinos (for all kind of gambling purposes) are virtual (nonexistent counterfeit money which are not backed by anything). They are the worlds future money that are set aside for pensions, mass immigration , the new world order agenda and general welfare as well as keeping everything afloat and going. Everything is a complete scam, everything is a hoax, everything is massively manipulated and fixed and everything still works thanks to lies and fear. This is the marked as of today.

El Hosel's picture

Market straight up through obvious rigging for several years and now 2% reaction is considered "dramatic".... Will anybody be suprised when we see the limit down curbs in for days and weeks? THat was just  the plastic new normal version of Drama.