ECB Waffles, Stocks Vacillate; ECB Divisions Mount

The much awaited moment of salvation from the ECB came with an initial disappointment

The impact has been to trigger sharp vacillation which led to sharp declines in European stocks (from Bloomberg) and modest loss in the US contemporaries. 

European stocks had sharply been up during the opening. The German DAX beat its June highs to carve a new record high before retrenching.

Here is how the newswires puts the US stock market loss (Bloomberg): ECB President Mario Draghi said policy makers will wait until next quarter before assessing if additional stimulus measures are needed. His comments damped speculation the central bank was poised to start a program of sovereign-debt purchases known as quantitative easing, or QE.

The BBC’s version: The European Central Bank (ECB) has "stepped up" plans for more stimulus measures aimed at revitalising the eurozone economy, bank president Mario Draghi has said. His comments came after the ECB held interest rates at 0.05%. Mr Draghi added the bank would assess the impact of its current stimulus measures early next year. He also gave his strongest indication yet that the ECB was willing to buy government debt. ECB staff "have stepped up the technical preparations for further measures, which could, if needed, be implemented in a timely manner," he said.

European stocks got rattled from the QE no-show. 

But in realizing that stocks must not be allowed to fall, the ECB made a U-Turn a few hours later. 

Shunting aside ambiguity, the ECB proposed that in January 2014 to buy all assets except gold.

From another Bloomberg article: The European Central Bank’s Governing Council expects to consider a package of broad-based asset purchases including sovereign debt next month, two euro-area central-bank officials familiar with the deliberations said… ECB President Mario Draghi said today that policy makers “won’t tolerate” a prolonged period of low inflation, and that officials discussed “all assets but gold” as potential targets for purchases. The council asked internal committees last month to design new unconventional stimulus measures to help fuel growth and inflation.

Yet the same article raises a key hurdle for ECB’s proposed QE: The European Court of Justice will deliver a non-binding ruling on Jan. 14 about the legality of the ECB’s OMT program, which was credited with stopping a rout in European government bonds in 2012 by pledging to buy debt of countries signing up to reforms. A negative judgment by the court could ultimately impinge on the ECB’s freedom to intervene in sovereign-debt markets.

It figures that there has been a reason for the ECB’s dithering, German media reports that the ECB President Super Mario Draghi has lost his majority hold on the central bank.

German’s Die Welt as quoted by the Zero Hedge (bold original)

The outlooks for growth and inflation are bleak. Mario Draghi will therefore open the gmoneyates - and is met with increasing resistance. And on the ECB's Executive Board, he has just lost the majority.

....

According to information obtained by "Die Welt", internal resistance to Draghi is now larger than previously thought. He can no longer count on a majority within the Board currently. In the vote on the official opinion of the Governing Council on monetary policy are for information of the "world" three of the six directors supported by the President to the original tune.

In addition to Sabine Lautenschlager and Yves Mersch, who had already previously expressed skepticism about bond purchases, one can now add the Frenchman Benoît Coeuré who is against Draghi's course.  ...There had been dissenting voices within the Board on several occasions, but there was always a majority behind the President.

After a few hours Super Mario vented his outrage and promised to deliver QE in spite of the opposition. 

From Reuters: The European Central Bank will decide early next year whether to take further action to revive the euro zone's economy, its president said on Thursday, signalling that he would not allow opposition from Germany or anyone else to stop it. In his clearest language yet, Mario Draghi underlined the central bank's commitment to supporting the ailing economy of the 18-country bloc, and argued the case for printing fresh money to buy assets such as state bonds.

So all these push-and-pull by the ECB and Super Mario sends US stocks on a pendulum (chart from the Zero Hedge)

The complete intraday picture of last night’s action by the S&P as shown above from stockcharts.com

Super Mario seems dead set to send stocks to the galaxy. As I recently wrote: The ECB seems dogged determined “do whatever it takes” to proceed with QE, even if it means running the Eurozone economies to the ground. What a sign of desperation!!!

The problem is there are natural limits to money printing, as I warned before: There is no free lunch even for the ECB. Germany’s domestic politics will function as natural constraint to Merkel’s accommodation of ECB’s Draghi. That’s aside from the court case filed before the European Court of Justice.  Should the ECB lose Germany’s total support, then perhaps all hell may break loose in the EU.

So when has stock market pricing, in the era of QE by central banks, been about real fundamentals? 

Interesting developments.