Global weekly: ECB pulls the strings

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ABN AMRO Private Banking, Expertise, Investments, Hedge funds

All eyes were on the European Central Bank (ECB) this week. The ECB surprised on Thursday with a large stimulus package, but disappointed markets with lower growth and inflation forecasts.

Macro and currency update

Thursday, 10 March the European Central Bank (ECB) lowered its main refinancing rate to 0.0% from 0.05%. It also cut its deposit rate to -0.4% as widely expected. In addition, it  expanded the asset purchase programme by EUR 20 billion to 80 billion a month and increased the eligible universe to include investment grade bonds of non-financial corporates established in the eurozone.

The package was more aggressive than financial markets had expected. Therefore, the euro initially moved lower across the board. ECB President Mario Draghi stated during the press conference that he does not see any need to reduce rates further and this resulted in a turnaround in sentiment pushing EUR/USD above 1.11 before it eased somewhat.

After the announcement of the ECB’s policy package, risky assets rallied, with corporates and periphery government bonds outperforming. The mood reversed after a strong initial rally, reflecting that the positive surprise from the announcement of the measures was undone by Draghi’s more cautious forward guidance on interest rates.

In its new staff projections, the ECB has revised its forecasts for economic growth and inflation lower again. Eurozone GDP is expected to grow by 1.4% this year, revised from 1.7% in its December 2015 forecasts. According to Draghi, the risks to the growth outlook remain tilted to the downside. In addition, according to the ECB’s forecasts the central bank will continue to miss its inflation target in the coming years. The forecast for inflation in 2016 was revised lower to 0.1% from 1.0%.

Last week, the US employment report played an important role in the improvement in investor sentiment. The strong US employment report fueled optimism that the US economy may not be as weak as feared. Next week, the Fed will decide on monetary policy. Market consensus is that the Fed will not change its policy.

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