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.
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