ECB’s Draghi Balks at More QE, Global Equity Markets Tumble

Need more proof that financial markets have been held hostage by politics?

This from Bloomberg, (bold emphasis mine)

European Central Bank President Mario Draghi cut interest rates and offered banks unlimited cash for three years while damping speculation the ECB will buy more government bonds to stem the region’s debt crisis.

Policy makers meeting in Frankfurt today reduced the benchmark rate by a quarter percentage point to 1 percent, matching a record low. They also loosened collateral rules so that banks can borrow more from the ECB and announced two unlimited three-year loans. The measures “should ensure enhanced access of the banking sector to liquidity,” Draghi said at a press conference.

Hours before European leaders meet in Brussels, Draghi kept the onus on them to solve the two-year debt crisis by repeating his call for a “fiscal compact” and denying he had hinted the ECB would automatically support such an initiative with more bond purchases.

Draghi’s comments roiled markets, with stocks and the euro rising on the bank-lending measures before falling after he damped expectations of more ECB bond buying. The euro sank more than 1 percent and traded at $1.3310 at 6:30 p.m. in Frankfurt.

This despite… (from the same article)

With the ECB’s focus on jolting banks into lending, Draghi made it easier for them to borrow cash from the central bank.

Credit claims such as bank loans will become eligible as collateral and the central bank reduced the rating threshold on asset-backed securities.

The ECB also cut in half banks’ reserve ratio, which determines the amount of money they have to deposit with their national central banks every month, to 1 percent of total assets.

Reserve requirements currently amount to around 206 billion euros ($275 billion), so the reduction means “a significant increase in available collateral to banks,” said Laurent Fransolet, head of European fixed income strategy at Barclay’s Capital in London.

Draghi said the new measures should encourage banks to lend to companies and households.

Easing bank lending conditions have not been perceived as sufficient. Apparently market’s addiction to inflationism has made them crave for more of ECB’s quantitative easing.

Yet the ECB seems to be using QE as leverage for the EU to attain a “fiscal compact” during today’s summit, a seemingly perennial event since the crisis emerged that hasn’t made any significant progress.

And like the September shakeout where Ben Bernanke jilted the markets over expectations of QE 3.0, yesterday’s selloff had been broadbased which included important commodity benchmarks as oil and gold.

Nevertheless today’s selloff hasn’t been in the same scale as the September episode.

So financial markets will continue to be heavily influenced by expectations of political actions which only means sustained significant volatility in both directions.

Yet considering how the ECB has been trying to ease the credit environment with assorted measures (e.g. reserve ratio, collateral eligibility), more QE from the ECB can’t be discounted.

ECB’s Draghi’s declarations looks more like posturing.