Almost exactly one month ago, on March 10, Mario Draghi unveiled his quadruple bazooka, which among other features, included the first ever monetization of corporate bonds (this has unleashed such an unprecedented scramble for European bonds that there are virtually none left in the open market leading to massive illiquidity and forcing yield chasers to sell CDS instead of buying bonds, thus laying the ground work for the next AIG debacle). More importantly, this was Draghi’s latest “whatever it takes” moment, and the “end justifying the means” was for European risk assets to rebound and the Euro to drop. This did not happen.

In fact, none of what has transpired to the assets that Draghi was intent to help, was supposed to happen. Here is DB’s Jim Reid explaining it.

It’ll be four weeks tomorrow that Draghi fired his quadruple bazooka and yet European markets are in apathetic mode. We show the returns of our usual selection of global assets since the cob the night before the last ECB meeting on March 10th. Perhaps markets haven’t been helped by a renewed but unrelated fall in Oil (Brent -9.1%, WTI -6.3%) since this point but it’s noticeable that outside of commodities the worst performers have generally been areas of the market that Draghi tried to help. European banks (-9.5%), FTSE-MIB (-6.0%), IBEX (-4.0%), and the Stoxx 600 (-3.0%) make up most of the other negative returning assets over this period.

The DAX has also slipped into negative territory over the period (-1.6%) after a -2.63% fall yesterday. These five European assets are now down -13.4%, -9.8%, -8.0%, -4.6% and -4.3%, respectively from their post-Draghi highs.

Things haven’t been helped by a +3.5% rally in the Euro over the period as a more dovish Fed and a belief that the ECB might be moving away from further rate cuts have shifted the debate. A more positive reaction has been seen in credit which is comfortably in positive return territory since the announcement and we’d still find it unlikely that many investors will be prepared to short European credit ahead of more details of the ECBs asset purchase plan.

Notwithstanding the current weaker sentiment we’d conclude that a softer dollar is probably better for reducing global systemic risk (not least as it helps China), even it causes headaches for the likes of Europe and Japan. Much attention was yesterday focused on the fact that the Yen briefly strengthened below $110 for the first time since October 2014 and also that the Nikkei is now down -16.7% YTD. The chatter is increasingly that this is a strong signal Japanese policy isn’t currently working in spite of seemingly aggressive action. Recent economic data out of Japan has been soft (Tankan and PMI’s in particular) and the question everyone is starting to ask is what the policy response from the BoJ may be. Further equity purchases have been mentioned while yesterday the former BoJ Governor Iwata suggested that the Central bank will hit its limit of government bond purchases in 2017 and suggested that further deeper negative rates would be more likely instead. The next BoJ meeting is the 28th of April and away from that another key decision is on the fiscal side and whether PM Abe will delay the upcoming hike in the consumption tax, a decision he has sounded ambivalent on so far.

Meanwhile the Stoxx 600, the DAX and European banks are now down -9.5%, -11.0% and -23.7% respectively YTD so there is a fear that Japan and Europe are becoming more resistant to central bank policies. Before getting too concerned, despite a -1.01% fall yesterday we should remember that the S&P 500 is +0.7% YTD and was at YTD highs only 2 days ago. So a softer dollar helps the US, leads to lower systemic risk but causes growth and asset return problems elsewhere.

And there is the post-mortem of the Shanghai Accord (which may or may not have happened): as long as the USD is tentatively weaker and keeps the Yuan contained, Europe and Japan will suffer, not only their capital markets, but also their exports and economies. The alternative is to allow the USD to resume its appreciation and to push both European and Japanese stocks higher, at the risk of inflaming the “Chinese problem” all over again.

How much longer will Draghi (and Merkel) and Kuroda (and Abe) keep their mouths shut and take the punishment unleashed on them by China (and a no longer data-dependent, dovish Yellen) before they snap and unleash the next leg in the global currecny devaluation race. That is the real ¥64 quadrillion question.





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