ECB: See you in October

october
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    • ECB President Draghi’s cautious tone sends bond yields lower, but not the euro.

    • Investment Committee downgrades UK equities to underperform, retaining its overall neutral equity stance

      US investors faced a volatile session yesterday as the overall mood remains cautious. While President Donald Trump’s recent debt-ceiling agreement with the Democrats is supportive in the short term, concerns are mounting as Hurricane Irma hit the Caribbean and approaches the Florida coast, with another two hurricanes forming in its wake. Markets reacted to this and the still-palpable North Korea tensions with risk-off behavior, with US Treasuries yields reaching 2.03% – a new low for this year – as the likelihood of another Fed rate hike later this year was priced out further. The S&P 500 index drifted marginally lower and was down 0.02%.

      ECB indicates October QE decision

      In yesterday’s monetary policy meeting, the European Central Bank (ECB) kept the policy rate unchanged. No changes to QE and forward guidance on interest rates. President Mario Draghi said that very preliminary discussions on the future of asset purchases had started, with a decision likely at its October policy meeting. The ECB’s current dilemma is mirrored in the revisions to macroeconomic forecasts, which show a continuing improvement in the growth outlook but still-weak inflation dynamics. Inflation for the next two years was downgraded due to the recent euro appreciation. While the statement cites the “recent volatility in the exchange rate” as a source of uncertainty, requiring monitoring, Mr. Draghi’s tone could not prevent a EUR appreciation, which again broke above 1.20 against the USD yesterday. The prospect of a very gradual exit from QE next year and his pledge to keep rates low helped government bonds, with 10-year German yields falling to 0.302% and also drifting strongly lower in the periphery. Also, shares in Europe gained nearly half a percentage point. Core countries outperformed, with the DAX adding 0.7%, while markets in Spain and Italy fell by 0.1% and 0.4%, respectively.

      ECB indicates October QE decision

      In yesterday’s monetary policy meeting, the European Central Bank (ECB) kept the policy rate unchanged. With no changes to QE and forward guidance on interest rates. President Mario Draghi said that very preliminary discussions on the future of asset purchases had started, with a decision likely at its October policy meeting. The ECB’s current dilemma is mirrored in the revisions to macroeconomic forecasts. It shows a continuing improvement in the growth outlook but still-weak inflation dynamics. Inflation for the next two years was downgraded due to the recent euro appreciation. While the statement cites the “recent volatility in the exchange rate” as a source of uncertainty, requiring monitoring, Mr. Draghi’s tone could not prevent a EUR appreciation, which again broke above 1.20 against the USD yesterday. The prospect of a very gradual exit from QE next year and his pledge to keep rates low helped government bonds, with 10-year German yields falling to 0.302% and also drifting strongly lower in the periphery. Also, shares in Europe gained nearly half a percentage point. Core countries outperformed, with the DAX adding 0.7%. Markets in Spain and Italy fell by 0.1% and 0.4%, respectively.

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