The Daily Update - Easing, Pleasing – Draghi Placates Markets with Dovish Speech

In a comprehensive speech today at the annual European Central Bank Forum, ECB President Mario Draghi concurred that, “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.” Throughout the speech – and indeed across ECB commentators as the conference continues – markets are hearing a clear dovish signal that the ECB is likely to enact more monetary stimulus unless the economic outlook improves. Following the speech the euro fell 0.3%, the Euro Stoxx 50 jumped 1.3%, Bund yields pushed their all-time lows beyond -0.3%  and inflation forecasts rose, albeit modestly, which has been a rare occurrence in 2019.

For six and a half years, the European Central Bank has consistently undershot its (below but close to) 2% inflation target; apart from a 4-month blip near the end of 2018 when HICP data was a fraction above target. Since the end of last year inflation measures and forecasts have plummeted with the latter reaching all-time-lows of 1.10 as measured by the Euro 5y5y inflation swaps. Furthermore, the US is painting a similar picture with its 5y5y rate plummeting from 2.3% starting May to 1.92 this week. Today’s speech seemed almost necessary in the context of growing market concerns that Central Banks have lost control of inflation expectations. However, Draghi reaffirmed that the Asset Purchase Programme still has “considerable headroom” and that the ECB “will use all the flexibility within our mandate to fulfil our mandate – and we will do so again to answer any challenges to price stability in the future”.

Just yesterday, in an interview with the Financial Times, ECB executive board member Benoît Cœuré stressed that, “the ECJ has also affirmed the principle that we should have broad discretion in designing our instruments. THE LIMITS ARE OURS. We already have some degree of freedom across securities.” Cœuré’s comments, along with Mr Mario-“whatever-it-takes”-Draghi’s and others’, signal that the ECB is not only prepared to cut rates but renew asset purchases – perhaps with increased allocation limits or even abandoning the capital key to allow disproportionate flows into regions facing greater stresses.

Again it seems market pressures have caused monetary policy makers to flinch where, arguably, fiscal stimulus would be the more effective countermeasure. This has been Draghi’s warning for years now, to little effect, and as he approaches the end of his term in October there is an ever greater chance of market jitters over the long-term ramifications of this pattern of expending monetary stimulus ammunition alongside idle and inept fiscal policy intervention across Europe.

Please read this important information before proceeding. It contains legal and regulatory notices relevant to the information on this site.

This website provides information about Stratton Street Capital LLP ("Stratton Street"). Stratton Street is authorised and regulated by the UK's Financial Conduct Authority. The content of this website has been prepared by Stratton Street from its records and is believed to be accurate but we do not accept any liability or responsibility in respect of the information of any views expressed herein. The information, material and content provided in the pages of this website may be changed at any time by us. Information on this website may be out of date and may not be updated or removed.

The website is provided for the main purpose of providing generic information on Stratton Street and on our investment philosophy for the use of financial professionals in the United Kingdom that qualify as Professional Clients or Eligible Counterparties under the rules of the United Kingdom Financial Conduct Authority (the "FCA"). The information in this website is not intended for the use of and should not be relied on by any person who would qualify as a Retail Client. Products and services referred to on this website are offered only at times when, and in jurisdictions where, they may be lawfully offered. The information on this website is not directed to any person in the United States. The provision of the information on this website does not constitute an offer to purchase securities to any person in the United States (other than a professional fiduciary acting for the account of a non-U.S person) or to any U.S. person as such term is defined under the Securities Act of 1933, as amended.

The website is not intended to offer investors the opportunity to invest in any Alternative Investment Fund ("AIF") product. The AIFs managed by Stratton Street are not being marketed in the European Economic Area ("EEA") and any eligible potential investor from the EEA who wishes to obtain information on the AIFs will only be provided with materials upon receipt by Stratton Street of an appropriate reverse solicitation request in accordance with the requirements of the EU Alternative Investment Fund Managers Directive ("AIFMD") and national law in their home jurisdiction. By proceeding you confirm that you are not accessing this website in the context of a potential investment by an EEA investor in the AIFs managed by Stratton Street and that you have read, understood and agree to these terms.

No information contained in this website should be deemed to constitute the provision of financial, investment or other professional advice in any way. The website should not be relied upon as including sufficient information to support any investment decision. If you are in doubt as to the appropriate course of action we recommend that you consult your own independent financial adviser, stockbroker, solicitor, accountant or other professional adviser. Past performance is not necessarily a guide to the future. The value of investments and the income from them may go down as well as up. An application for any investment or service referred to on this site may only be made on the basis of the offer document, key features, prospectus or other applicable terms relating to the specific investment or service.

Where we provide hypertext links to other locations on the Internet, we do so for information purposes only. We are not responsible for the content of any other websites or pages linked to or linking to this website. We have not verified the content of any such websites. Such websites may contain products and services that are not authorised in your jurisdiction. Following links to any other websites or pages shall be at your own risk and we shall not be responsible or liable for any damages or in other way in connection with linking.

By using this site, you should be aware that we may disclose any information that we hold about you to any regulatory authority to which we are subject, or to any person legally empowered to require such information.

This website uses cookies to improve user experience, by clicking the "I Accept" button below means you consent to the use of cookies on our website.