“Having been stung in December by disappointing market expectations, it was important that Mr. Draghi did not make the same mistake twice. Since then, we have seen a major spike in financial market volatility, a fall in Eurozone inflation, some weakness in the main Eurozone business surveys and cuts to global growth forecasts.
“Today’s announcement more than met expectations for policy easing, with a cut in the refi and deposit rates, a 20bn Euro increase in monthly QE purchases, purchases of corporates bonds, and a new Long Term Refinancing Operation (LTRO) arrangement. The addition of non-bank corporate bond purchases and the new LTROs, where borrowing can be as low as the deposit rate, were perhaps the main surprises.
“The initial reaction of markets was very clear, the Euro fell sharply and equities rallied. Draghi’s comment at the press conference that he thought further rate cuts were now unlikely, reversed this initial reaction. Looking through these very short term reactions however, the proof of the pudding will be a rise in Eurozone inflation expectations and a further pick up in lending growth.
“With the Fed set to increase interest rates later this year, central bank divergence and our ‘Fed lone hiker’ scenario is still our base case. This has led us to favour both Eurozone and Japanese equities, on the back of expectations of easier policy. With the ECB’s colours now firmly nailed to the mast, it’s over to the Bank of Japan not to disappoint. We also look for another Fed hike to push both the Euro and Yen lower.”
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