Mario Draghi fails to deliver fuel to central bank's stimulus and Irish bond yields leap

The costs of borrowing for Ireland and other eurozone countries leaped yesterday, European stockmarkets sank, and the euro surged against the dollar and sterling.

The events occurred after ECB president Mario Draghi disappointed market expectations by not adding more fuel to the central bank’s big stimulus programme.

“Super Mario was not so super after all,” said Ryan McGrath, a senior bond trader at Cantor Fitzgerald Ireland.

“It was the first time that Draghi failed to deliver in that the markets were disappointed. The markets reacted particularly aggressively,” he said.

The cost of borrowing for the State climbed 20 basis points to 1.2% from 1%, an unusually large move on any given day, as the 10-year bond surrendered all of its gains since November 11.

Even more aggressive moves resonated through other eurozone government bond markets, with the 10-year German bund rising to 0.67%, and the yields on Italian and Spanish bonds also surging 23 basis points.

WATCH LIVE: ECB's Mario Draghi holds news conference, with further measures expected https://t.co/fEqSrXRdub pic.twitter.com/19rEZRxWBT

— Bloomberg (@business) December 3, 2015

European stockmarkets also sold off, and the euro surged, unwinding some of its benefits of the weak currency against the dollar and sterling that has so spurred Irish exporters for over a year.

The ECB did cut its deposit rate, by the minimum 0.1 percentage point but most traders had expected it do more, to -0.3%, and extended its asset purchase programme but failed to increase the amount of government bonds it buys each month.

The euro sprang 2.3% higher against the dollar to $1.086, having been nearer $1.06 just hours earlier, while the euro also at one stage climbed over 1.75% against sterling to 72.2p.

Mr Draghi and his colleagues did extend the minimum length of time it will buy government bonds for, but there was disappointment there too as it had been expected to increase the amounts it buys a month from €60bn to €70bn.

“Everyone was expecting Draghi to be the white knight for Europe once again and he hasn’t really showed up,” said Aberdeen Asset Management Investment Manager Patrick O’Donnell.

“Today’s measures amount to tinkering around the edges.”

Mr McGrath said that with a likely hike in US interest rates coming down the line that the euro could resume its falls against the dollar.

“After the knee-jerk reaction, people will realise that monetary policy remains extraordinarily supportive,” Mr McGrath said.

“In two weeks, the Fed is expected to raise rates. Inflation and growth have not fundamentally shifted,” though the euro would likely not fall toward parity against the dollar as quickly as some people had expected, he said.

Against sterling, the euro could trade between 71p and 73p, because the Bank of England would probably delay raising UK rates for a while, he said.

The ECB’s failure to meet the expectations for further policy loosening fuelled by its doveish signals has dented its reputation for communication and the outlook for the eurozone economy, Capital Economics in London said.

“We still expect a bigger divergence between eurozone and US monetary policy than is currently expected to bring the euro down further against the US dollar, to below parity next year,” said its chief European economist Jonathan Loynes.