Rolling Coronavirus updates - ECB 'like a doctor who has run out of medicine'

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InvestmentEurope is providing ongoing coverage of responses from the fund industry to developments linked to the spread of Coronavirus.

Updates will be added to this article on an ongoing basis as they are received. Comments are filed daily. Scroll down to click between dates (pages).

12/03 1620 UMT - Blatant absence of rate cut

Wolfgang Bauer, co-manager of the M&G Absolute Return Bond Fund, commented:

"The blatant absence of an interest rates cut—in contrast to the Fed and the Bank of England—serves as a stark reminder that with the deposit rate already at -0.5% the ECB has significantly less room for manoeuvre compared to other central banks. Additional measures—namely more favourable terms on the new round of LTROs and additional net asset purchases of €120bn until the end of the year—failed to calm down markets. In fact, the risk-off tone intensified materially following the ECB's announcements with iTraxx Xover—a bellwether of European high yield risk—jumping up by around 120 basis points to levels last seen in 2012.

"With the ECB's monetary policy seemingly approaching its wits' end, Christine Lagarde highlighted the importance of a firm and coordinated fiscal response to tackle the impact of the Covid-19 situation on the European economy."


12/03 1615 UMT - 

Ulas Akincilar, Head of Trading at the online trading platform, INFINOX, commented:

"Like a doctor who has run out of medicine, the ECB's desire to unleash further monetary stimulus in the face of the coronavirus threat collided with harsh reality.

"With the Bank's main deposit rate already at a record low and deep in negative territory, it simply couldn't cut any further without risking the self-defeating prospect of putting banks off lending. Instead it promised to give eurozone banks capital relief and other incentives to ensure they keep providing vital finance to Europe's badly squeezed small businesses.

"Coming after interest rate cuts were made in both the US and the UK, the ECB's unexpected rate hold briefly gave the euro a lift. But that momentum quickly fizzled as confidence in the eurozone is now holed below the waterline.

"With official data showing that the bloc's economy stagnated at the end of 2019, and its third biggest economy - Italy - on total lockdown, the US travel ban is both a symptom and a cause of a crisis that is spiralling out of control. Normally an interest rate hold here while rates fall in London and Washington would pep up the embattled euro. But we left normality behind a long time ago, and the single currency soon fell victim to the rout on Europe's equity markets."


12/03 1613 UMT - Still trying

Oliver Blackbourn, Multi-Asset portfolio manager at Janus Henderson Investors, commented:

"On the edge of exhaustion but still trying, the ECB did what it could today. It threw money at banks, paying them to increase lending. However, a population that can't spend because the shops are closed - like in Italy - doesn't need credit. Staving off defaults has to be the predominant target, helping both companies and consumers get through the current situation. Another €120bn of quantitative easing may help peripheral bond markets, although Italian government bonds didn't seem to get the memo. It is also difficult to see how quickly the asset purchases filter down into corporate borrowing in a credit market that is barely functioning.

"Eurozone governments have previously ignored calls from the ECB for structural reforms, but perhaps this time they will listen to calls for fiscal stimulus. However, there was little indication of a coordinated approach between the ECB and major eurozone governments. Markets seem set on forcing a response as they continue to slide. Indications that Germany may scrap its balanced budget stance are not enough; markets want to see decisive action and they want it now. There have been concerns about the fractured nature of power within the eurozone since 2011 and it is crisis situations like this that investors have feared. Similar to the political situation in the US, markets can only hope that as the crisis escalates, policy makers are forced to overcome their differences and find a way to present a united response."


12/03 1610 UMT - Surgical support

Kames Capital fixed income manager Nick Chatters commented:

"So it was Lagarde's big day. The ECB response to the virus spread was about doing what they could that would actually be effective. They didn't cut rates, and they didn't add a huge amount to the asset purchase program. That would help out markets, but not directly the second tier companies that need the sales they have lost back. Markets therefore don't like it, but the ECBs job today, as Lagarde puts it, is to provide "surgical support" to those that they can actually help with monetary policy."


12/03 1600 UMT - Lagarde failed to deliver

David Zahn, head of European Fixed Income, Franklin Templeton, commented:

"Following moves by the US Federal Reserve and the Bank of England (BoE), the European Central Bank (ECB) was widely expected to announce fresh stimulus measures to support the economy against the Covid-19 outbreak. Despite high expectations, ECB President Christine Lagarde failed to deliver what many market participants were expecting: interest rates remained unchanged at minus 0.5 per cent, a move which widely disappointed markets.

"Whilst fresh stimulus measures such as more cheap loans for banks to encourage them to keep lending to small businesses and expanding the asset purchase programme to €120bn are helpful, in our view they do not go far enough. We would have liked to see a much more accommodative stance from the ECB, given the impact of coronavirus on the economy and the drop in the oil price which will hit inflation. However, the ECB believes these are temporary events that the market will move through and has put the onus on EU leaders to provide more fiscal support rather than relying on monetary policy. In our view, this is not supportive for markets and markets have responded accordingly."


12/03 1550 UMT - ECB underwhelms

Jon Day, fixed income portfolio manager at Newton Investment Management and manager of the BNY Mellon Global Dynamic Bond Fund, commented:

"The European Central Bank (ECB) underwhelmed market expectations when it failed to deliver a rate cut and announced a time-limited increase in its quantitative easing programme. 

"The market gave the decision a big thumbs down and trading in the Italian bond market was halted during Lagarde's press conference due to severe price falls. In the ECB's monetary statement, it said it was seeing no ‘material signs of strains in the money markets or liquidity shortages' - this is a concerning statement for investors given the major dislocation all asset markets have endured this week. It seems the ECB is falling behind the curve.

"The ECB is continuing to look for fiscal stimulus as the primary way to fight the upcoming virus-induced slowdown. Lagarde's call for co-ordinated European Union action will have investors waiting to see if the EU will line up its efforts to fight the economic impacts of the coronavirus. Italy has already increased its spending package to tackle the economic fallout; other countries need to follow suit."  


12/03 1530 UMT - ECB fails market expectations

Moritz Sterzinger, director at Chatham Financial, commented:

"The ECB is doing its part in combating the negative impact of the coronavirus in a very targeted fashion: additional asset purchases until the end of the year, a temporary relaxation of banks' capital requirements and, most importantly, an expansion of its LTROs (longer-term refinancing operations) with the aim to encourage bank lending to small- and medium-sized companies.

"Like any other central bank, Christine Lagarde and the Governing Council had to contend with the fact that monetary policy cannot fix interrupted supply chains or stimulate consumption when people stay home out of fear or due to containment measures. Considering this, the measures announced by the ECB today seem appropriate and are a genuine attempt to come up with a policy response that takes into account the underlying nature of the coronavirus shock.

"By allowing those banks that will make use of the lending programme, to borrow from the central bank at rates from -0.25% to -0.75%, the ECB heavily focusses on removing lending constraints to small businesses.

"Markets had priced in a cut to the deposit rate, which the ECB didn't deliver on. But as Christine Lagarde made clear during the press conference, the council's intention was to design policies that are targeted and hence likely to be the most effective in the current situation. On this particular point, the ECB departs somewhat from the Fed and Bank of England who have very recently performed emergency rate cuts. However, given the current level of euro interest rates, it is indeed highly doubtful whether any further reductions in the ECB's deposit rate would provide any meaningful stimulus, particularly in the current situation where weak demand is not the result of high borrowing costs.

"At the same time, this episode highlights the ECB's uncomfortable position of being left with very little room for further monetary easing. It has once more become evident that fiscal policy needs to play a much larger role in supporting the eurozone economy - not only to deal with what is hopefully a temporary fall in economic activity, but also going forward once the coronavirus crisis is over."