Back On May 19, ECB executive board member Benoit Couere caused a scandal of heretofore unseen proportions, when it was revealed that he had disclosed European central bank policy in private [17]to a group of hedge funds almost 12 hours before the ECB publicly revealed a substantial shift in QE policy, namely that the central bank would front-load its program in May and June while slowing down monetization later in the summer.
The result was millions in profits to those hedge funds who had acquired the information about ten hours ahead of the public, and shorted the EURUSD appropriately:
[18]
Sure enough, a few weeks later we found out that the ECB had done precisely as it had originally leaked to the "smartest people in the room", when it was revealed that in May the ECB had bought about 9% more in government bonds [19]among the key issuers: Germany, France, Italy and Spain.
[20]
Fast forward three months, when earlier today we received the latest ECB asset-buying update [21], and just as the ECB has warned, after a brief surge period early in the summer, monetization under the ECB's Public Sector Purchase Programme tumbled in August, when the ECB monetized just €42.8 billion in Eurozone bonds, down 17% from the €51.4 billion the month before, and the lowest full-month since the start of the ECB's QE in March of this year.
Adding €7.5 billion in covered bonds and €1.3 billion in ABS purchases, took the monthly total to just €51.6 billion, far below the ECB's stated goal of monetizing €60 billion in securities each month, and is well below the May and June peak totals of €61 and €63 billion, respectively.
From Bloomberg [22]:
The European Central Bank’s asset purchases last month slowed to the weakest since quantitative easing started in March as liquidity dried up during Europe’s summer holiday period.
While the Frankfurt-based central bank intends to buy 60 billion euros a month of debt through September 2016 to revive euro-area inflation, it has repeatedly said the program can be adjusted to take account of market conditions. Purchases were frontloaded before the summer and ECB President Mario Draghi has signaled that the same strategy may be used before December.
Draghi also said last week that the size, composition and duration of the QE program can be altered if needed for the ECB to reach its goal of returning medium-term inflation to just under 2 percent. Consumer prices rose an annual 0.2 percent in August and the euro-area recovery risks being undermined by a China-led slowdown in global growth, spurring speculation that the ECB may need to ease monetary policy further.
Visually:
[23]
What is the reason for the drop? Well, one can believe the ECB's stated explanation which is that due to European summer vacations, activity in Europe has ground to a halt. Of course, this would suggest that monetization in the Eurozone is continent on managers' summer vacation plans, which is probably an even more troubling explanation of ECB activity bottlenecks than what may be really going on in Europe.
The alternative? As we noted over the weekend when we reported that now even the IMF is discussing the upcoming limits to BOJ QE [24]as a result of a "seller strike" - i.e., current holders (and sellers) running out of BOJs to hand over to the BOJ, the same may be taking place in Europe. Recall that none other than the ECB's Nowotny admitted on Friday [24]that the ECB's asset-backed securities purchasing program "hasn’t been as successful as we’d hoped" adding that "it’s simply because they are running out. There are simply too few of these structured products out there."
And if the ECB is hitting its monetization limits with ABS, why not also with Treasurys? Because if that is indeed the case, then with the US tightening financial conditions by way the upcoming (?) rate hike, and China now engaged in Quantitative Tightening, the last thing global stocks can withstand is news that the ECB will also be forced to taper its own QE monetization, not because it wants to but because there is not enough paper left to buy.
Somehow we doubt global equities will take this news in stride, especially when it was none other than Deutsche Bank which over the weekend hinted [25] that just the tightening by the Fed and the PBOC the potential to lead to a "-20 or even 40 percent" drop in equities.
Now add to that the IMF's concerns that the BOJ will be soon tapering, and the just announced slowdown in ECB monetization, and suddenly all BTFD bets seem very off...
