Draghi delivers, sparking markets back to life

The ECB proves it has the bottle to deliver, using all the tools at its disposal to sink the euro and heighten hopes of a recovery in European stock markets.

ECB president, Mario Draghi
Source: Bloomberg

The hesitancy and indecision that has pervaded financial markets this week was a reflection of the mistrust that has grown of whether the European Central Bank (ECB) will ever truly deliver upon the expectations Draghi creates. However, today we have seen the ECB truly out-deliver expectations with a package of monetary easing measures that span across the whole range of tools at the committee’s disposal. There was no indecision this time around, with cuts across both the refi and deposit rates, alongside four new TLTRO’s and crucially a €20 billion monthly increase to the QE programme. Given the deterioration in inflation, manufacturing, consumer sentiment and financial markets in the past three months, such a drastic shift is justified, yet unexpected nonetheless.

The market reaction has been relatively predictable, with the euro tumbling over 1% and DAX up 1.50% in the immediate aftermath. The big question is whether this will be enough to drive bullish momentum for the coming weeks in a bid to end the stock market downturn that has dominated 2016 so far.

There is a big difference between market and economic response to any monetary policy decision and ultimately this round of easing will be judged down the line by the ability of the eurozone to finally exit the downturn of recent years. Inflation has been arguably unresponsive to previous easing and with substandard growth despite a plethora of previous measures, there is little reason to believe this will truly be the golden bullet for the eurozone. 

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.