ECB action: markets disconnected from reality?

The triggering of public debt buybacks by the Central Bank heightened investor euphoria. Excessive movements?

The power of central banks in financial markets is enormous. Mario Draghi has just proved it once again with the launch, on Monday, of its "quantitative easing" (QE). A barbaric name to designate the nuclear button of central bankers, when their classic weapon of lowering interest rates proves ineffective in combating economic depression, or even deflation. By committing to buy back some fifty billion public debt securities issued by States on the resale market between investors until September 2016 (or even more, if necessary) by pure monetary creation, the ECB is behaving a bit like an elephant in a bowling game. She spills them all.

Interest rates demanded by investors to finance states are collapsing: since the latter are sure to find a buyer, there is no need to pay them a lot. The situation is so exceptional that some are now even ready to pay to hold European public debt! It's as if your bank started paying you an interest rate for the money it lends you...Germany, for example, is remunerated when it borrows money on all maturities less than 10 years.

187 billion to borrow for France

Even the countries of southern Europe, whose borrowing rates had soared during the sovereign debt crisis, are now financing themselves at historically low rates. Spain, for example, raised more than 2,6 billion euros over 10 years on Thursday at a rate of just over 1%. On the secondary market, the French 10-year rate is now around 0,4%, whereas it was still around 2% at the start of 2014, an already very low rate. Very good news as the France was to borrow some 187 billion euros on the markets this year, but totally disconnected from economic reality since the debt is heading towards 100% of GDP.

The CAC 40 exceeds 5000 points

This spectacular movement was certainly well underway before the start of the week. But its continuation shows that all the effects of the exceptional action of the ECB were not yet integrated into market prices. Bond rates aren't the only ones to plummet. At the same time, the euro continued to slide against the US dollar. The single currency is now hovering around 1,05 dollars, whereas it was still at 1,39 in May 2014 under the combined effect of the action of the ECB and the prospect of a rise in interest rates across the Atlantic.

The vigorous reaction of the ECB to the supposed risk of deflation finally had the effect of boosting the equity markets. Reassured, investors are turning to riskier assets than public bonds to continue to generate returns. This raises the European markets. Result, the CAC 40, whose companies benefit from their very international presence, crossed the symbolic bar of 5000 points on Friday evening (+17% since the start of the year), a level that it had not reached since May 2008, ie before the outbreak of the financial crisis.

Ignored risk factors?

These movements are so strong that some economists are beginning to worry about them, despite the good performance of global growth. This is the case of Marc Touati, of the economic and financial consulting firm Acdefi. "While the fall in the euro and the rise in the stock markets are partly justified, they are now reaching levels that are excessive in relation to economic reality. The same is true of the low interest rates on bonds European states or the price of a barrel [of oil, Ed]. “, he warns on Friday.

Certainly, the CAC 40 remains far from its historical ceiling of the year 2000, where it had come close to 7000 points, unlike the Dow Jones index, the flagship index of the American Stock Exchange and that of the German Stock Exchange (DAX) . But taking into account the comfortable dividends received by its shareholders (as is the case for the DAX), its performance is much stronger.

The risk factors in the economy are however not lacking. But they are all "ignored, worries Marc Touati. Whether geopolitical [Ukraine, Middle East, Africa], domestic policy [rise of extremist parties and terrorist risks] or economic [non-reimbursement of the Greek debt ]". Waking up is therefore likely to be painful. It remains to be seen when a grain of sand will come to stop the runaway. Or if the CAC 40 can still continue to rise without any problem towards its historical record within 12 to 18 months, as certain funds no longer hesitate to predict.

source: Lepoint.fr

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