Market Noise

Markets are already over Draghi’s ‘disappointment’

Thursday’s headlines fretted over initial sharp declines across equity markets (see chart) on the back of Mario Draghi’s latest policy announcement, which apparently disappointed investors hoping for the imminent launch of full-blown quantitative easing by the ECB.

As a side note, most of the concern manifested in European markets themselves – outside of Europe, the dip attributed in much of the press to Draghi in fact looks to be rather a reflection of continued declines in the oil price, with energy stocks leading US markets lower. This point alone highlights how tempting it is to claim you know what’s going on by pinning markets movements to any plausible-sounding factor, without actually acknowledging the real underlying picture – or the fact that there may be very little justification at all.

Draghi equities

The abrupt interruption to the upward trajectory equity markets have been on since the last short-lived panic in mid-October, suggests market participants felt Draghi had said something important on Thursday. But by Friday morning, they seemed to be reassessing what this actually was. European equities had reversed losses by lunchtime, helped by better-than-expected German factory orders, but the addition of falling European sovereign bond yields on Friday pointed at the main reason – investors have decided they actually quite like what Draghi had to say after all.

Initially, the disappointment was that further stimulus measures from the ECB would not be considered until next year. Because investors are human beings, and human beings like to assign a lot of importance to things like the end of a calendar year, not doing something until ‘next year’ sounds quite meaningful, when in fact the 31st of December is just a matter of weeks away and there’s no reason to expect any automatic fundamental change to the nature of the global investment landscape on the stroke of midnight. Anyway, investors seem to have now realised that what Draghi actually said largely represented a reaffirmation of the ECB’s commitment to doing ‘whatever it takes’ to boost the Eurozone economy, while hinting that the bank has already begun preparations for full QE early next year.

In reality, Draghi said very little that suggested any change to the big picture in terms of the direction of Eurozone policy in recent months. But ultimately, whether you believe Draghi is trying to dampen expectations for full QE or build support for it, the most important thing to bear in mind is that the journey the European economy will have to continue on if QE is to happen is nothing to celebrate. Stimulus measures from all central banks are data-dependent first and foremost. Which means only a genuine deterioration in the European economic outlook will ensure the implementation of bond-buying programmes. For much of the Eurozone, a lot of the data over the past 12 months has actually been improving, although with a great deal of divergence between countries recently. So we remain cautiously optimistic on selected European assets. However, persistently low inflation suggests we should expect the ECB to remain very accommodative for now. And of course, all that will really matter is what Draghi does, not what he says. For us, the key will be keeping a close eye on how this is perceived by markets and respond according to the observable facts on the fundamental European economic picture.


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