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Thursday, November 6, 2008

ECB Cuts But Nobody Buys

After the Bank of England (BoE) cut by 1.5%, this cut of 0.50% is seen as a little bit of a disappointment.

Equities futures did a feeble pop and drop and are now languishing again at overnight lows. Considering the magnitude of the cuts, (the Swiss tossed in a surprise 50 basis point cut of their own for good measure) this is deeply worrying.

Equities are clearly going to go cliff diving now. Let it Bounce, So We Can Short Again still stands. I got my first set of shorts off yesterday as the S&P 500 (ES DEC08) couldn’t get back above the 1000 mark in early trade. I’m adding here since it is clear now that absolutely nothing can inspire buyers…

ECB Cuts Interest Rate by Half Point to Counter Economic Slump: “The European Central Bank lowered interest rates for the second time in less than a month to counter the euro region's worst economic slump in 15 years.

ECB policy makers meeting in Frankfurt reduced the benchmark lending rate by half a percentage point to 3.25 percent, as predicted by all but one of 55 economists in a Bloomberg News survey. The ECB cut the rate by the same amount when it joined a globally coordinated move on Oct. 8 in response to the deepening financial crisis. The Bank of England today lowered its key rate by 1.5 percentage points to 3 percent and Switzerland's central bank lowered rates in an unscheduled move.

Economists predict the ECB will continue to reduce borrowing costs at the most aggressive pace in its 10-year history, taking its key rate to 2.5 percent by April as growth slows around the world. The economy of the 15 nations sharing the euro is probably already in a recession and will stagnate in 2009, the European Commission said this week.

“The dimension of the crisis requires forceful action,” said Michael Schubert, an economist at Commerzbank AG in Frankfurt. “The ECB is more focused on the risks to growth.”

ECB President Jean-Claude Trichet will hold a press conference at 2:30 p.m. to explain today's decision.

`Door Open'

Trichet will “probably leave the door open for further rate cuts,” said Holger Schmieding, chief European economist at Bank of America Corp. in London. He will “likely warn that the euro economy will not grow at all in late 2008 and early 2009 and recover only haltingly thereafter.”

Economic growth in the euro area will slump to just 0.1 percent next year, the worst performance since 1993, the Brussels- based European Commission forecast on Nov. 3. It said the economy, which contracted in the three months through June, will probably continue to shrink in the third and fourth quarters.

Europe's manufacturing and service industries contracted at a record pace in October while executive and consumer confidence has slumped to a 15-year low. Manufacturing orders in Germany, Europe's largest economy, dropped by a record 8 percent in September, the government said today.

The crisis that started with the U.S. housing slump and drove Lehman Brothers into bankruptcy caused the biggest global stock sell-off in 70 years. Banks in Europe remain reluctant to lend to each other even after the ECB flooded them with cash and governments announced rescue packages to prevent banking failures.

`Behind The Curve'

“Interest rates have to be appropriate for the economic environment,” ECB council member Axel Weber said Oct. 30. “If the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve.”

The Federal Reserve last week cut its benchmark to 1 percent from 1.5 percent and signaled it's ready to take rates to the lowest level on record. China and Japan have also reduced rates, and Australia this week slashed borrowing costs by three quarters of a percentage point.

The ECB raised rates as recently as July, saying Europe's economic fundamentals were sound and inflation was a bigger threat than weaker growth. Since then, oil prices have more than halved from a peak of $147 a barrel.

Inflation slowed to 3.2 percent in October after reaching a 16-year high of 4 percent in July. Still, the ECB aims to keep the rate below 2 percent. Trichet has stressed the need for moderate pay increases, saying there's a risk of a wage-price spiral as workers seek compensation for the higher cost of living.

Lowering interest rates too much also risks re-fueling the excessive borrowing that led to today's problems, ECB Executive Board member Lorenzo Bini Smaghi said on Oct 31.

“The present crisis is partially due to interest rates that remained at low levels for too long,” he said. “At that time, rates were lowered too much in order to stimulate growth. We need to avoid repeating the same mistakes.””


eh said...

...this is deeply worrying.

Not so worrying if you're short and know this won't do anything the same way the Fed's cuts haven't done anything except hurt responsible people who've saved. The problem has been too much cheap debt, not too little. Individuals are not going to take on more debt now. Businesses that could borrow even if there was no rate cut won't because debt-based over-consumption is dead.

At least this crisis has served to awaken more people to what buffoons most political and financial leaders are.

Half Empty said...

I think we still have strong support at Dow 0. I predict the market will definitely not breach this benchmark....

Cory said...

Just stopping by. Im afraid this is way over my head.

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