Key takeaways from ECB actions

ECB's punitive actions yesterday, to just reduce rates by 10 basis points and six months extension baffled market participants and analysts (including us), all around globe, leading to massive short covering in Euro, which was up around 3% by end of day against Dollar.

We continue our post-mortem to improve upon,

Takeaway 1 - Blind faith could cost big bucks

Evidence were plenty (better growth PMIs, improved core inflation, improved loan dynamics) to suggest bazooka may not be big instead most chose the blind faith, hoping for a big bazooka.

Takeaway 2 - Beware of extreme sentiment

Given the blind faith, short Euro and long Euro-zone bonds were one of the most extreme sentiment trades, so it was clear any action has to be very big to overwhelm and miss from that could be very volatile and in opposite direction, which is exactly what happened.

Takeaway 3 - Forward mis-guidance

In modern financial world, where forward guidance has become a big-time policy tool, there is also risks associated to this tool (just like any other) and that is forward mis-guidance, which has been the case for ECB's over-promise and under-deliver.

Takeaway 4 - Policy divergence still exist

Yesterday's Euro's move is not an indication of end of policy divergence but moderation of extreme sentiment. ECB may have under delivered but delivered nonetheless. It doesn't mean that Euro can't move up higher in the short term, it means it is likely to remain under pressure once the divergence comes back in focus.