German Court Questions ECB QE – Why That is a Big Deal

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German court rules that parts of ECB QE violate EU charter
Investor sentiment dented
Nikkei -2.84% Dax -3.33%
UST 10Y 0.66%
Oil $24/bbl
Gold $1698/oz
BTCUSD $9023

Asia and the EU
AUD RBA Statement unchanged
GBP UK Final Services PMI 13.5

North America Open
USD ISM-Non Manufacturing 10:00

German Constitutional court issued a ruling questioning some of the provision of the ECB QE bond-buying program, flipping market sentiment in early European dealing and sending EURUSD below the 1.0900 figure.

The court did not rule that the QE program violated the EU charter but asked the ECB for clarification that the program was “proportionate” to the response. In the end, the legalistic objections of the German court are unlikely to amount to much, but the optics of the ruling along with its usual Teutonic bluntness truly spooked the markets sending EURUSD lower by 70 pips and reversing a string rally equities with 30 minutes of the announcement.

At a time when the Eurozone needs maximum coordination and massive federal fiscal response to dig itself out from the biggest economic calamity since the great depression and hint of fragmentation in the region especially one that comes from its biggest member was sure to jar the markets regardless of the legalese. The court was quick to note that the ruling did not apply to the current ECB pandemic programs, but since the pandemic rescue programs lie upon the legal foundation created by QE the damage was done.

For now, the capital markets continue to operate on the assumption that the global financial system will remain globalized, integrated and united – but the political hints from almost every region of the world point to the exact opposite path. The US-China tensions are just one manifestation of the de-globalization of the world economy, but the tensions persist within the national unions as well. The fragmentation between Northern and Southern Europe and between Blue and Red states in the US over the financing provisions to alleviate the damage done by the virus are laying these conflicts bare showing that there is far greater division amongst the populace at a time when maximum cooperation is needed.

This nascent conflict between the brutal political reality of the day and the naive economic expectations anchored to a world view that no longer exists is setting up the markets for a much deeper and more protracted decline if the divisions are allowed to intensify into the year-end.

For now, however, the hopeful wishes of a return back to “normal” continue to dominate market trade with investor sentiment still positive on the day. The eco calendar carries the ISM – Non-manufacturing data which is expected to be horrid in April, but the focus will be on the employment component which tends to be one of the best proxies for Non-Farm payrolls data and if that proves to be better than forecast the risk flows could extend as the day proceeds.

Boris Schlossberg
Managing Director

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