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Why Draghi comments might actually be bullish
By Thomas H. Kee Jr.
Published: Dec 4, 2014 2:00 p.m. ET
If you’re reacting to the news from the European Central Bank today, your head is spinning in circles.
However, much of the catalyst to the confusion started with an interpretation of comments from ECB President Mario Draghi that may not actually have been accurate.
Before the market opened today his comments suggested that the ECB might not be engaging in a broad-based QE program because instead of detailing a program or his intentions to engage one, he talked about general conditions and goals to address conditions in the coming year. Correctly, at no time did he say that the ECB would engage in a broad-based QE program — but neither did he say that it wouldn't.
Instead, it was the market’s interpretation of his comment that sent futures down aggressively before the market opened and it is that interpretation that also caused the market itself to fall in the regular session.
Without knowing the information that would soon surface, my advice to clients was to understand that this type of news can often be shrugged off, especially when the continuing intention of institutional investors whose performance is lagging the benchmark is to buy the market on every dip.
That is, in fact, exactly what is happening in today's market environment. The U.S. Treasury department issued a warning recently that suggested recent investor activity demonstrated an aptitude for chasing yield without respecting risk. While I largely believe that the assessment is correct, there’s some evidence suggesting that the practice of chasing the market that we're witness to now will likely continue through year-end.
If last year is any indication, which it very well may be, the practice of chasing the market that is going on today adds a bid to the market that might not otherwise be there.
Especially when the rationale for market decline is based on news that could easily be shrugged off, institutional investors whose objective is to buy the dip to improve relative performance are more likely to do so, and that was my note to clients before the market opened. The objective was to look for opportunities to buy the dip as well, with a trading intention of course.
Subsequently, something surprising happened. Additional news surfaced that suggested that the comments from Mario Draghi, although not satisfying to the market at the time, actually did open the door for a broad-based QE program, one that might actually begin much sooner than later, while acknowledging that bond buying was already taking place anyway, regardless of what they called it.
Environments like we are in today, even though investors aren't paying attention to fair value — as the U.S. Treasury department warns — institutional investors who are lagging behind this market want to buy every dip to improve their relative performance because, at least in some part, the fees they generate are based on relative performance.
That implies that the market is unlikely to fall by any substantial amount before the end of the year, barring some sort of material event of course, and the comments from Mario Draghi simply weren't material enough and might even turn out to be quite bullish given what has transpired.
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