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Market awaits solution it doesn’t think will work

European participants in the capital markets are waiting, with bated breath, for Thursday’s European Central Bank meeting and the expected announcement of quantitative easing, as well as the outcome of Greece’s Parliamentary elections on Sunday. But an interesting dynamic has set in around what were once thought to be two of the most important events of the start of 2015: no one seems to care much about either anymore.

QE has been priced in on the presumption that it is the last tool available to the ECB to fight weak growth and the threat of deflation, and thus must be used — yet there is also a growing consensus among bankers and economists that such a programme won’t have the intended effect, or that the ECB will embark on an underwhelming version of QE.

And an increasing number of market participants think that even a worst case scenario for Greece in which the nation exits the euro would have little long term effect on the region’s health. As for the debt markets, their low-interest rate induced catatonic state has led them to quickly absorb terrible shocks in the recent past such as the conflict in Ukraine.

The only thing it probably couldn’t come to terms with easily now is a lack of QE, which would essentially amount to a complete paradigmatic shift. A lack of QE would mean a very large group of people let a very large amount of money ride on a losing bet. The nervous energy one can feel in the markets right now is not one of excited hope - the kind we experienced before some of Mario Draghi's previous announcements - it's the anticipation of a desperate gambler waiting for the river card to flip. 

“No one is excited about anything,” one syndicate manager lamented over a beer on Tuesday. As this was being written, Royal Bank of Scotland's Alberto Gallo - who thinks the ECB will actually surprise to the upside on Thursday - published a research note including the results of a poll of investors on the expected effectiveness of QE. The result? More than half said they think QE will only work in financial markets, with a quarter saying they don't think it will work at all.

The consensus desire for QE is really not much more than an acknowledgement that the eurozone may be entering a Japan-like period of prolonged weakness.

That is a hard thing to get excited about. 

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