Get ready for another easing bias as the European Central Bank announce later today

Thursday, 25th July 2019 10:45 - by Shant

Coming up today is the European Central Bank announcement on their latest policy intentions, and as the governing council has warned in recent weeks, the global downturn has had a more lasting effect on the Eurozone economy and they stand ready to act in order to achieve their primary mandate of keeping inflation close to 2.0%.  Of course, in order to do this, they need to get growth back up to more encouraging levels and in the current climate, one senses that monetary policy will have a limited impact.  Despite this, central bank thinking is pretty much set in stone - not least of all, due to the limited tools at their disposal.  

Later today, the widespread view is that they will use forward guidance to prepare markets for further cuts to the deposit rate, with 20bps priced in between now and the end of the year.  Adding to this are widespread expectations that the ECB will also look to restart the QE program, and while this could prompt fresh disagreement among the leading member states, we reiterate the point that the policy toolkit is limited.  No surprise then that president Mario Draghi has consistently urged structural reform in order to garner support from the fiscal side.  Indeed, this is a common theme among the major central banks, with the Fed's chair Jerome Powell also urging the US government to redress the burgeoning debt load on the US economy.  

One thing is clear however and that is that equity markets are front running the softer line by central banks.  Next, to the Federal Reserve, ECB policy is a keenly watch by global markets, though stock pickers will need to exercise a greater degree of differentiation.  This morning, we see the European bourses holding off the highs as they await the policy decision after midday.  Watching some of the components, we can see Deutsche Bank is higher today, though given what I discussed last week about low and negative rates, banking stocks are perhaps not the best way to reflect easier financial conditions in Europe, though valuation is clearly playing a part in the price action this morning.  

Based on the PMI data released yesterday, there is now a clear risk that despite expectations of a greater reliance of forward guidance at today's meeting, the ECB may choose to pull the trigger early in any cuts in the deposit rate.  In light of this, we now have to consider what this effectively offers to EU corporates with comparatively higher debt profiles. At best, it buys time until global demand can at least begin to stabilise. If lending does indeed pick up, then banking stocks may indeed offer a better opportunity based on the underperformance seen of late. 

The focus will then shift quickly to the Federal Reserve, where the easing bias will add further support to global stocks - the Wall Street indices front running a softer line with the S&P 500 also pressing on the recent highs.  Events today could be a tipping point, especially if the ECB 'go early'.  That looks to be the risk at present.

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.