ECB measures highlight fears over global (as well as Eurozone) slowdown

Friday, 8th March 2019 11:10 - by Shant

Stocks took an ugly turn for the worse today as the ECB meeting on Thursday surprised markets with a change in forward guidance.  Having previously stated that they will hold interest rates here through the summer of 2019, they will now sit on their hands into 2020 as the grip of the economic slowdown is causing them greater concern than was previously assumed. 

This was exacerbated by the announcement that they will implement a TLTRO - a targeted longer-term refinancing operation - which in itself was not a surprise, though the timing was. Central bank pundits were largely in consensus that the governing council of Europe would wait until future meetings, perhaps April, before deciding on this action, so the move this week clearly has an air of urgency about it which has fed through to the markets.  ECB hawks - it was reported - were resigned to the fact that the data (facts) do not lie and there was no point in delaying the inevitable.  Given the governing council's reluctance to overindulge risk appetite, this was a clear sign that they are worried.  

This also clearly highlights the fear factor over global growth - which was communicated in the ECB press conference - and Europe is as much a benchmark as Australia - the latter being a major producer and distributor of raw materials.  While Australia has a closer correlation with the emerging markets, the Eurozone is highly export-dependent and has naturally suffered over concerns over trade tensions emanating from the tariffs introduced by the White House administration.  As I have consistently pointed out, the key concern the world over is that of fragile demand.  That the market seems to have priced in a trade deal between the US and China seems to have missed the point completely and as I noted in my previous post, seems to suggest that equity market valuations - as a whole - seem to be running on hope rather than real economic substance.  

This was later compounded by the export data from China overnight which reported a 16.6% year on year drop in Yuan term with the February trade balance in Dollar terms at a 4bln surplus after a $39bln surplus in January.  Any doubt that global trade is suffering has surely been put to bed, and while it is easy to get swept up in the tide of pessimism over valuation levels, the signs point to an ongoing slowdown in the global economy and the ECB chose to act pre-emptively.  

The immediate reaction in the Dax, which we will take as the benchmark index for the Eurozone, was to rally, but by the end of the day, the daily candle was showing red as Wall Street stocks tumbled - to the tune of 25pts at one stage.  However, in familiar fashion, US stocks have once again stabilised as dovish central banks cushion losses.  On the week, however, it is not looking so appealing and while investors will want to stick to safe stocks, such as pharmaceuticals, the broader outlook perhaps warrants inclusion of say, precious metals.  In this instance, despite the Dollar gains seen yesterday, the yellow metal managed to carve out a base in the $1275-80 area, and we would suggest these levels are a relatively attractive starting point.  

One thing was standout yesterday, and that was the fact that easing measures may have less of a soothing effect on investors who naturally look for dividend prospects and growth. Even the Fed has turned dovish since the start of the year and there is every chance that we have peaked in the tightening cycle, despite claims that there are perhaps one or two more hikes to come.  This looks a stretch, and perhaps unnecessary.  It is my central view that they have indeed raised far enough, though inflation will play a key part, though this is largely predicated on wage growth at this point. 

Capital appreciation is something which looks strained at best, so with the combination of the above factors in play, choose your safe havens carefully. 

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.