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ECB's 'taper tantrum'? Gold plummets but few expect an end to Europe’s easy money

JOSEP LAGO | AFP | Getty Images

Assets in Europe received their first "taper tantrum"-style jolt on Tuesday afternoon with a report that policymakers at the European Central Bank (ECB) were looking at winding back its trillion-dollar bond-buying program.

Bloomberg cited officials at the euro zone's central bank saying that the 80 billion euro-a-month program could be tapered in steps of 10 billion euros before the official conclusion of its quantitative easing. Although, it heavily caveated that view with suggestions it could still be extended past the current end-date of March 2017.

A spokesperson for the ECB said that the Governing Council "has not discussed these topics", which President Mario Draghi has previously iterated. And market watchers just weren't buying the news either.


Gold plummets

There may be suspicion and denials over the report, but it did manage to move the markets on Tuesday afternoon. In May 2013, policy minutes from the Federal Reserve sparked fears the central bank could start tapering off its $85 billion-a-month bond purchasing program. This came to be known as the "taper tantrum" and there were similarities on Tuesday.

The euro strengthened against the dollar and German bond yields moved up and weighed on U.S. sovereign debt markets. The real move was in gold were traders spoke of the report accentuating bullion's biggest one-day percentage drop since September 2013.

"It's a bit premature to talk about tapering," Vasileios Gkionakis, head of global FX strategy at Unicredit, told CNBC Wednesday.

The Bloomberg story looked more like a combination of a "trial balloon and stating the obvious" with QE never going to stop dead, according to Carsten Brzeski, the chief economist at ING-DiBa.

"Testing market reactions to trial balloons is not new to the ECB. The (Federal Reserve) experience with a too early announcement of tapering, however, should still be a good warning to the ECB not to start these tests too early," he said in a note Wednesday.

Reduction but not tapering?

Assets have steadied since Tuesday's turmoil but it will likely act as a reminder that aggressive monetary policy will come to an end one day. Without even referring to the Bloomberg report, analysts at Barclays unveiled new research on Tuesday evening that might shine a brighter light on what the ECB will do next year.

Philippe Gudin, chief European economist at Barclays, and a team of researchers said that they expected an extension of QE with a reduction in the pace of monthly purchases.

"We believe that in 2017, the ECB will choose to purchase less than 80 billion euros per month, but it will need to manage communication carefully to explain that reducing the amount of monthly purchases while maintaining it for an undefined but long period is not tapering," the research note said.

Others have spoken of similar moves and have underlined that the ECB is currently finding it tough buying bonds at its full capacity and needs to widen its parameters. The next ECB Governing Council meeting is on October 20.

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