UK and Europe
Stocks got a boost on Thursday after the European Central Bank fired a bazooka of more quantitative easing and interest rate cuts. Peripheral banking shares from the likes of Spain and Italy saw some of the biggest gains after the ECB revealed it would begin four new targeted loan programs include non-bank corporate debt in its QE purchases.
Stocks came off highs of the day when some of the initial euphoria was nullified by the suggestion by ECB president Mario Draghi that rates would not be cut any further. In the press conference Mr Draghi said that the ECB doesn’t anticipate further rate cuts based on the current view, adding that there are limits to how negative rates can go without hurting banks.
Mr Draghi did the hard work of convincing an apparently divided group of European central bankers that a bazooka was needed but committed the cardinal central banker sin of signalling a possible end to what is essentially an open-ended program.
The main measures added in March, the one year anniversary since QE began were an increase in monthly asset purchases by €20bn to €80bn including non-bank corporate debt, four new TLTRO programs with a maturity of four years and cuts to all main interest rates. The rate cuts included a surprise drop in the main refinancing rate by 5bps to 0% as well as a 10bps cut to the deposit rate. The ECB also raised the issue share limit to 50% from 33%, meaning the ECB can now own half of an entire bond issue.
The ECB sees the risk to euro-area growth titled to downside. The ECB sees 2016 economic growth at 1.4% (down from 1.7%), 2017 at 1.7% (down from 1.9%) and 1.8% for 2018. Inflation forecasts saw a massive drop to 0.1% for 2016 from 1.0% previously with the next two years remaining below the 2% target.
The further ECB goes down the “unconventional tools” rabbit hole, the more the question gets asked “Is this everything?” A negative refi rate, equity purchases and “helicopter money” remain possibilities but have not yet been discussed by the ECB according to Mr Draghi.
The FTSE 100 was an underperformer thanks to oil and gas and basic resource shares which all dropped on the news the March meeting between OPEC and non OPEC members would not be taking place. Shares of Aviva (LON:AV) were atop the UK benchmark after the insurer reported higher than forecast annual operating profit and indicated its integration with Friends Life is ahead of schedule.
US
US stocks were flat in early trading after a drop in the price of oil offset a boost to monetary stimulus in Europe.
FX
The US dollar was mostly weaker on Thursday as a main counterpart to euro strength that kicked in during the ECB press conference.
The euro reversed initial losses after Mr Draghi said the ECB doesn’t anticipate more rate cuts based on the current view, adding that the governing council doesn’t see any need to reduce rates further.
While the suggestion of no more rate cuts was the signal, the euro always looked at risk of a short-squeeze amidst the growing feeling that monetary policy has run its course. Fiscal reform needs to take the place of central banks in supporting growth but as Mr Draghi politely put it, so far governments have been “sluggish” to enact them.
Commodities
The cancelled meeting between OPEC and non-OPEC countries including Russia saw oil prices reverse early gains. It appears Iran’s unwillingness to even consider an output freeze has derailed the meeting and could even scupper the freeze itself.
Precious metal prices snapped a two-day losing streak, bouncing sharply off the lows as the euro strengthened and the dollar weakened. Two attempts in two days to close below $1250 per oz in gold have failed, suggesting ongoing demand even at higher price levels.
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