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Super Mario becomes Stupid Mario

Peter Switzer
11 March 2016

By Peter Switzer

With earnings season over in the US and here, stock markets will be driven by the two Ds: data and decisions. With decisions, we’re in the hands of people. One of those people was supposed to bring along a bazooka to the European Central Bank (ECB) meeting last night but, given the market reaction, it looks like Mario Draghi showed up with a popgun!

As the US comedian Jerry Seinfeld observed many years ago: “People? They’re the worst!”

Once tagged Super Mario, the ECB boss, could end up being Stupid Mario, following a string of disappointing decisions when there were high expectations that something was coming. That was the case overnight so when I woke to red on the screen of my iPhone’s stocks page, I knew Mario failed to do what he once promised — “whatever it takes!”

Failure for a central banker is easily seen and Mario’s failure was obvious when the German DAX was down 2.31%, the French CAC 40 lost 1.7% and the UK’s FTSE 100 index dropped 1.78%.

But wait, the ECB’s decision was not always seen as bad. In fact, after the announcement of a lower refinancing rate to 0% and the central bank’s deposit rate being cut to -0.4%, it also increased its monthly asset purchases (or bond-buying)  by 20 billion euros to 80 billion a month. This looks like a fair bit of stuff (bazooka-like) that should’ve helped stocks not hurt them, so what happened?

To add to the drama of the day, after the measures were announced, stock markets soared, banks share prices surged and the euro fell, which all looked like signs that the ECB has satisfied stock market players, who worry about a possible recession, deflation and the possibility that central banks are out of fire power.

I said market reaction says Draghi brought a popgun and the Citgroup chief economist Willem Buiter called it a peashooter ahead of the ECB announcement. However, the changes were pretty well as good, if not better, than what was expected. Therefore I ask again: what happened?

Well, Mario made the foolish mistake of saying too much! The BBC reports that Jasper Lawler of CMC Markets said: "Stocks came off highs of the day when some of the initial euphoria was nullified by the suggestion by ECB president Mario Draghi that rates would not be cut any further."

Yep, that was it. The idea of no more rate cuts spooked the market. Unfortunately, the market smarties didn’t conclude that the ECB’s work was done, look out for growth, and that’s because Mario also said that the ECB had cut its Eurozone growth forecast from 1.7% to 1.4% for 2016.

So it was just a case of Mario not keeping his big mouth shut. Just when we needed a circumspect and careful German or Pom, we had a too communicative Italian and the hedge fund pariahs thought “here’s a chance to sell!”

Despite telling his press conference that the Eurozone wasn’t in a deflationary situation, which should have been good news, what dominated was ‘no more rate cuts, falling growth and maybe this central bank has lost its firepower’.

The Draghi effort didn’t do enough to counter the Buiter claim that the global economy is in a “death spiral” into a recession. Oil and iron ore prices weakened overnight so expect a sell off of stocks locally today.

What happened overnight in Europe didn’t help the view that central banks are nearly out of firepower. Mario might have a bazooka but is running out of ammo?

Oil prices weren’t helped by talk that Iran might not attend the March 20 meeting to at least freeze production, which has helped oil prices rise lately and, in turn, has helped stock prices rebound.

As I said earlier: “People? They’re the worst!”

Next week we have the Bank of Japan and the US Federal Reserve meeting on interest rates, as well as the expected OPEC meeting on March 20. So there are plenty of opportunities for people to do their stuff, regrettably.

 

 

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