ECB: Buy The Rumor, Sell The News

Despite the ECB’s policy action yesterday, which pushed out the date of the first interest rate increase and confirmed a substantial package of targeted bank financing intended to ease credit conditions for the corporate sector, the market reaction was largely negative. Yet a key part of our bullish call in January was that equity valuations had retreated to levels which were close to long-term averages, a relatively unusual occurrence in this economic cycle. Since then, equity valuations have rebounded sharply as markets have risen while 2019 consensus profits estimates have fallen. This was largely in anticipation of easier monetary policy in our view. We now expect markets to trade only sideways in the absence of a near-term catalyst while awaiting evidence of a turn in the economy during Q2/Q3. In respect of a US/China trade deal, the apparent cancellation of the Xi/Trump summit due in late March is however unhelpful for sentiment.

According to a number of economists, the ECB yesterday delivered a positive surprise if not shock and awe by pushing out the date of the first eurozone rate increase into 2020 and introducing a new round of targeted long term refinancing operations (TLTROs), designed to improve the flow of credit into the real economy. At the margin, the extension to the lift-off date for interest rates also extends the period for which the ECB will continue to maintain the quantity of its corporate and government bond portfolio.

A prerequisite to this ECB action, in order to achieve a consensus at the ECB’s Governing Council, was a meaningful reduction in the ECB’s economic forecasts. According to press reports ECB internal sources believe there may even be more cuts to growth forecasts in future. ECB President Draghi has also confirmed that the risks remain tilted to the downside, even after the new policy direction. Forward market inflation expectations have also been falling to levels well below the ECB’s target of below but close to 2% inflation.

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Disclaimer: Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing ...

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