Spreadex Market Update
Draghi reveals drastic measures but market can’t make its mind up post-ECB announcement
The expected 10 basis points deposit rate cut (to -0.4%) was joined by a €20 billion monthly expansion to €80 billion for the current QE programme, a new TLRTO (targeted longer-term refinancing operations) for Eurozone banks that launches in June and can be as cheap as the negative ECB deposit rate, an ability to buy corporate bonds and, most shockingly, a cut to the benchmark interest rate that takes it to 0% for the first time in history. Highlighting just why this swathe of measures had been introduced, the ECB cut growth forecasts to 1.4% from 1.7% for 2016 whilst slashing inflation forecasts to 0.1% from 1%.
Initially the DAX, CAC et al. sprung into life, surging around 3% as the measure were revealed; now, however, they are up a far more tempered 1.2% as investors try and digest the news. Yet this movement looked positively pedestrian when compared to how the euro behaved after the announcement; plunging over 1% against the dollar and the pound, the region’s currency then managed to rocket back into the green against both sterling and the greenback as Draghi claimed he doesn’t think the central bank will have to cut interest rates again. The post-announcement reaction suggests that, however much Draghi has compensated for December’s disappointment, there are still a few doubters out there. For whilst the measures revealed are certainly impressive, they still have to, well, work. And in that regard there is no guarantee.
Whilst the Eurozone dealt with its drama things the FTSE spent the afternoon sliding backwards, falling into negative territory as its commodity sector failed to lose its reddish hue. The Dow, meanwhile, managed to steal to residue goodwill from continental Europe, rising around 100 points after the bell.
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