This week’s main event for the global markets was the European Central Bank (ECB) monetary policy meeting. Markets and investors had been pointing to this meeting for quite a while, as deflationary pressures and anemic growth continued to negatively impact the Eurozone economy. The ECB had to come out with a bold program, as ongoing concerns about an immigrant crisis and potential Brexit (U.K. exit from the European Union) were also hurting sentiment and confidence.

Back in December, the market had also anticipated bold action from the ECB. Unfortunately, the ECB underwhelmed the markets at that time with tepid measures and the euro reacted negatively in disappointment. This time, the ECB and President Mario Draghi learned their lessons from December and came out with a much bolder stimulus package that exceeded market expectations.

The ECB cut all of its key interest rates and increased its monthly bond purchase program. The ongoing experiment with negative interest rates continues as the ECB cut the rate on deposits by a further 10 basis points to -0.40 percent.

Initially, markets rejoiced at the news with the euro falling by about 1.3 percent and European equities – specifically bank stocks – soaring.

However, during the press conference that followed the press release, Draghi said he doesn’t see the need to reduce interest rates any further. The euro, which had fallen sharply on the headline news, immediately reversed course and traded much higher. German stocks dipped into negative territory after being sharply higher.

Our View: Mario Draghi clearly threw a hand grenade into the markets with his comments, and whether or not he and the governing council are correct remains to be seen.  We are strong advocates that central banks should know their weapons are limited, so in that sense his comments are welcome. But the gamble is whether or not the ECB can hold the line in the face of a weak European economy.

The information in this report was compiled by the staff at City National Bank from data and sources believed to be reliable but City National Bank makes no representation as to the accuracy or completeness of the information. The opinions expressed, together with any estimate or projection given, constitute the judgment of the author as of the date of the report. City National Bank has no obligation to update, modify or amend this report or to otherwise notify a reader in the event any information stated, opinion expressed, matter discussed, estimate or projection changes or is determined to be inaccurate. This report is intended to be a source of general information. It is not to be construed as an offer, or solicitation of an offer, to buy or sell any financial instrument. It should not be relied upon as specific investment advice directed to the reader’s specific investment objectives. Any financial instrument discussed in this report may not be suitable for the reader. Each reader must make his or her own investment decision, using an independent advisor if prudent, based on his or her own investment objective and financial situation. Prices and availability of financial instruments are subject to change without notice. Financial instruments denominated in a foreign currency are subject to exchange rate risk in addition to the risk of the investment. City National Bank (and its clients or associated persons) may, at times, engage in transactions in a manner inconsistent with this report and, with respect to particular securities and financial instruments discussed, may buy from or sell to clients or others on a principal basis. Past performance is not necessarily an indication of future results. This report may not be reproduced, distributed or further published by any person without the written consent of City National Bank. Please cite source when quoting.