The central banks did not put anything under the Christmas tree for financial markets to cheer yet. “Not good enough” was the main take, and the euro strengthened and risk assets tanked.
The most awaited communication this week turned out to be a disappointing one. As suspected, it was hard for Mario Draghi & Co. to over-deliver after talking up expectations for months now: rate cut and programme extension or not. So immediately after the European Central Bank update, a complacent year-end week turned into a stormy monster. The euro strengthened and anything risk-related took a beating. Earlier, the Fed chairperson confirmed the year-end hike and showed no reaction to quite disappointing US figures, with US manufacturing indices hitting contraction levels. In the run-up to the OPEC meeting, oil prices went helter-skelter on contradicting statements of the participating members.
Christian Gattiker is chief strategist and head research at Julius Baer
Additional monetary stimulus measures fell short of expectations but are appropriate given the economic backdrop of the eurozone. The room to do more should erode some of the euro’s strength over the next 3 months.
The European Central Bank (ECB) fulfilled only partially high-flying market expectations. In contrast to prior action, ECB President Mario Draghi abstained from surpassing expectations by cutting the deposit rate only to the widely expected level of -0.3% and limiting the extension of the asset-purchasing programme to the runtime only, leaving the monthly volume unchanged. The euro recovered strongly to more than 1.08 EUR/USD and eurozone bond yields rose. Given the positive eurozone economic data in the past weeks, we assess the ECB measures as fully appropriate. The moderate cut in the deposit rate leaves the door open to do more in the future. The ECB might use this room short-term in case the most recent euro strengthening starts threatening the eurozone recovery. Hence we stick to our 3 months EUR/USD 1.06 forecast.
David Kohl is chief currency strategist and head economist Germany at Julius Baer
From a fundamental perspective short-term disappoint should turn into medium-term outperformance.
Yesterday’s announcement of the ECB regarding further stimulus measures has caused quite some volatility as positive expectations were not met and traders closed positions immediately. However, from a medium-term perspective the prolongation of the QE programme should be supportive for eurozone equities as the gap between the Fed and ECB balanace sheets will further narrow going forward. We consequently stick to our preference for eurozone equities and recommend buying peripheral exposure given the elevated domestic sales exposure.
Christoph Riniker is head Equity Strategy Research at Julius Baer