David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer
European Central Bank (ECB) president Mario Draghi has engineered a positive surprise despite high expectations by pooling a whole set of small monetary policy measures.
A further cut of the deposit rate to -0.4% had been expected, which is also true for the announced increase of the monthly bond purchases from EUR 60bn to 80bn.
There was a small disappointment as the expected extension of the asset purchasing programme beyond March 2017 has not been announced. Nevertheless, the ECB has been able to deliver various small surprises including a reduction of the main refinancing rate to zero from 0.05%.
Admittedly, a small step, but as room for bold actions is exhausted, a strategy of a number of small measures was the best the ECB could do.
Another set of targeted long-term refinancing operations (TLTROs) has been an additional measure and the construction of these TLTROs will actually allow banks to get ECB money with negative rates, opening the door for ECB-subsidised lending.
With regard to this comprehensive set of measures and the efforts to advertise this and past ECB measures during the press conference following the decision, the financial market reaction is rather disappointing, highlighting the diminishing power of central bank over asset prices.
A jump at equity markets and the drop in the EUR and bond yields reversed quickly. We maintain our neutral outlook for the euro with a 3-month target of 1.09 EUR/USD.
The ECB delivered as much as it could do and even managed to surpass expectations. The unconvincing financial market reaction points to a diminishing power of central banks over asset prices.
STRATEGY
Christoph Riniker, Head Equity Strategy Research, Julius Baer
Investors mistrust the ECB
Following yesterday’s bold announcement on more ECB action to stimulate the economy, equity markets first reacted positively but on second thought dropped heavily into negative territory again.
The DAX 30 for example was up 2.8% just ahead of the press conference and closed the day with a minus of 2.3%. The FTSE MIB was even up 4.4% and eventually managed to lose “only” 0.5% in the end.
Even markets outside the eurozone could not escape these trends. We currently have the impression that the remedies in place do not function anymore as they did previously.
As a consequence we will review our stance on eurozone equities in the coming days.
Given the impression that the ECB has failed yesterday, a review of our eurozone assessment will take place.
FIXED INCOME
Markus Allenspach, Head Fixed Income Research, Julius Baer
Europe: ECB intensifies the quest for High Quality Liquid Assets – we still prefer USD bonds
The European Central Bank intensifies the quest for High Quality Liquid Asset, i.e. for bonds that are eligible for the Liquidity Coverage Ratio (LCR).
