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Why didn't the markets cheer Draghi's bazooka?

After an initial sharp spike in European equities, led by the banks and a 1 percent plus drop in the euro against the dollar following the European Central Bank's raft of measures to stimulate the euro zone economy, things started to take a curious turn.

Banks mostly managed to hang onto gains after President Mario Draghi's larger than expected stimulus package -- which included a decision to cut rates further into negative territory and a extension of its bond-buying program -- but the euro, which touched at low of around $1.0830 against the greenback during Draghi's speech staged a dramatic U-turn.

Mario Draghi
Ralph Orlowski | Reuters
Mario Draghi

The single currency bounced around 1.7 percent higher, trading at around $1.1192 after the press conference ended, even after what most analysts agreed were wide-ranging measures that were more expansive than predicted.

So what went wrong? Draghi pledged that interest rates would stay very low for a long time and indeed low "well past the horizon" of the ECB's bond purchases. The central bank also cut its benchmark interest rate from 0.05 percent to an all-time low of 0 percent as well as taking its deposit facility from -0.3 percent to -0.4 percent, meaning banks effectively have to pay more for the ECB to hold their cash overnight.

But the ECB President also suggested that this deeper cut into negative territory could be the ECB's last, and in doing so pushed the euro higher and forced stocks lower.

"Rates will stay low, very low for a long period of time and well past the horizon of our purchases. From today's perspective and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook," Draghi told journalists at the press conference at the ECB headquarters in Frankfurt.

"Let me also add, that the experience that we had in our case with negative rates has been very positive in easing financing conditions and in its transmission of this better financing conditions to the real economy," he said.

The pan-European STOXX 600 surged as much as 2.5 percent as Draghi began to speak, before giving up all gains to close over 1.6 percent lower following the comments on negative rates.

Meanwhile safe haven gold got a bid, gaining over 1 percent to trade around $1,268 per troy ounce. German bund prices also turned lower on the day, boosting yields, which in turn helped the 10-year Treasury yield to a high of around 1.950 percent.

But while the moves seen in the aftermath of Draghi's speech were perhaps not in the direction Draghi would have liked, analysts are positive on the impacts the deal will have for markets and the economy longer term.

"Ignore the euro's swoon; this is an aggressive response," said chief euro zone economist at Pantheon Macroeconomics, Claus Vistesen.

"On the question of negative rates, Draghi talked himself into a bit of a cul-de-sac by noting that the ECB does not expect rates to be reduced further. The euro duly rallied, but we do not think the zero bound has necessarily been reached, and we also note that the ECB strengthened its forward guidance by introducing the comment that rates will remain low 'well beyond the end date of QE purchases.'

"This reaction of currency markets confirm our view that the Fed matters more for the trajectory of the euro dollar in the short run than does the ECB," he said.

"Understandably, given the various concerns which have been expressed about negative rates and their impact on the banking sector (above all in the highly impaired euro zone), Draghi was always going to have to answer some awkward questions," said strategist at ADM Investor Services, Marc Ostwald.

"But his (honest) observation that there are limits to how low rates can go, and the lengths the ECB can go to, in terms of unconventional measures, served to undermine much of the 'positive impact' of what had been announced. As much as the latter is perfectly true, this was as much of a mistake in communication terms, as "under-delivery" of new policy measures were in December. Nevertheless, it probably reflects the point that Draghi made a grand bargain with the council majority of one last big policy move, but no more," Ostwald added

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