When Central Bankers Whisper Secrets
At a time when the U.S. Federal Reserve is being probed for leaking information to investment firm Medley Global Advisors, you'd think central banks worldwide would want their interactions with market players to be as impeccable and unimpeachable as possible. To its shame, the European Central Bank seems to have no such ambitions.
At 8 a.m. London time today, the euro dived against the dollar after headlines flashed across trading screens saying the ECB would buy extra bonds this month and next to compensate for slower buying in the summer. A select group of traders, bankers and economists, however, had a 14-hour jump on that news -- because it had already been revealed to them at a private meeting in a Knightsbridge hotel last night:
A high level conference to be held on Monday, 18 May 2015 entitled "Removing the Zero Lower Bound on Interest Rates." The meeting is organized by the Brevan Howard Centre for Financial Analysis at Imperial College London Business School, the Centre for Economic Policy Research and the Swiss National Bank.
The scheduled speaker at the 6 p.m. "drinks reception and conference dinner" at the Berkeley Hotel was ECB board member Benoit Coeure. Journalists were not admitted. Helpfully, the ECB supplied the text of Coeure's remarks, albeit the morning after. Here's the key passage:
We are also aware of seasonal patterns in fixed-income market activity with the traditional holiday period from mid-July to August characterised by notably lower market liquidity. The Eurosystem is taking this into account in the implementation of its expanded asset purchase programme by moderately frontloading its purchase activity in May and June, which will allow us to maintain our monthly average of 60 billion euros, while having to buy less in the holiday period.
Here's what happened to the euro today, after the official release of Coeure's comments:
And here's what happened to the euro in the hour after Coeure was scheduled to make his speech yesterday:
Now, I can't prove to you that anyone at the conference traded on what the ECB policymaker announced. But my wordy, doesn't that look just a bit more than suspicious? Here's another way of thinking about it: If the euro is currently worth about $1.115 now that investors have absorbed the knowledge of the ECB's bond-buying plans, and it was worth $1.135 before the world had any inkling of its intentions, then the persistent decline in that 14-hour period smells awfully like a profit opportunity for someone.
And I use the word "smells" advisedly. Brevan Howard oversees $27 billion, and is incredibly successful. It's also free to sponsor any event it chooses. But central bankers shouldn't be in the business of selectively disclosing market-moving information at closed-door conferences sponsored and attended by hedge funds. I'd suggest an inquiry is in order.
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