Euro dives on Draghi, stocks rally
The euro fell and stocks rallied after ECB chief Mario Draghi talked up the prospect of interest rate cuts and more QE.
The euro shipped 50 pips in short order and euro area bond yields dropped as Mario Draghi gave the strongest signal yet the European Central Bank is about to launch a fresh round of easing measures.
Speaking at the annual central banker bean feast in Sintra,
Draghi said: ‘Further cuts in policy interest rates and mitigating measures to
contain any side effects remain part of our tools,’ and added that the asset
purchase programme ‘still has considerable headroom’ and that in the absence of
inflation returning to target, additional stimulus will be required.
Draghi has really opened the door to more cuts and a new
round of quantitative easing. He’s in full dove mode now, the towel has been
thrown in. Building on the last ECB meeting, at which some members discussed
reopening QE, this looks like a clear signal that the central bank is preparing
markets to expect monetary policy to become more accommodative this year.
This is entirely in line with our long-held view that the
ECB would ultimately be forced to do more to stimulate the ailing Eurozone
economy. Inflation expectations are being crushed – Euro 5y5y inflation swaps
lately sunk to record lows- below 1.2% for the first time. Economic indicators
continue to show a deep and persistent slowdown.
The euro dived lower and the breakout now looks lost. EURUSD
was trading at 1.1240, already under pressure having slipped the 1.13 handle,
before it dropped sharply to trade on the 1.11 handle at 1.1190. The Fed
meeting is unlikely to help the euro with dovishness well and truly baked in –
in fact the Fed has a low bar for a hawkish surprise that could put more
pressure on the euro.
German bund yields are lower again, with the 10-year sinking
This Draghi put lifted stocks – the Euro Stoxx 50 rallied
over 30 points quickly to trade at 3409, having been languishing around 3370.
The DAX shot up more than 150 points. All else equal, which it seldom is, more
easing from the ECB should be a boost for equity sentiment.”