DE30: 7th anniversary of Draghi’s “whatever it takes”

Summary:

• European equity markets kick off mixed after the ECB meeting
• Today is the 7th anniversary of the famous words expressed by Draghi
• DAX declines toward the key technical support, what to expect next?

After hectic trading on Thursday due to the European Central Bank meeting, Friday’s morning has brought mixed results as investors keep digesting what the ECB (not) delivered. As we already know, the ECB refrained from cutting rates or relaunching its bond purchases, however, it actually pledged to do so in September when new staff economic projections are available. A market reaction was ambiguous - first rates and the euro tumbled, then recovered during the Draghi’s press conference when he informed there had been no discussions on cutting rates already in July. Moreover, we were also offered a meaningful change in rhetoric with regard to the ECB’s inflation objective. For the first time, the bank explicitly stressed that there was no cap on 2% and it would treat its target symmetrically. It means the Governing Council could tolerate price growth either slightly below or above 2%. 

In practice, it is a major shift in the bank’s reaction function allowing it to keep expansionary policy for longer. Therefore, in our view it is a clearly negative for the shared currency but it does not necessarily mean it will depreciate substantially until the ECB’s September meeting. It is all about rate differentials, hence if the Federal Reserve decides to hint at more rate cuts or even relaunching net asset purchases, it would be enough to push the EURUSD higher. On top of that, one needs to be aware that the US dollar is expensive based on a REER approach, thus there is no doubt that space for its depreciation is much more abundant than for appreciation. Meanwhile, today is the 7th anniversary of Draghi’s “whatever it takes” when he pledged to “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Ever since, the ECB has deployed a lot of measures, including cutting rates below zero and purchasing billions of euros of governmental and corporate bonds. Has it been enough to preserve the euro? The answer is simple “yes” as the EMU has not collapsed, however, it has undoubtedly not been enough to spur desirable price growth in the Eurozone economy.

Technically the DE30 saw a huge decline on Thursday as equity investors were clearly disillusioned with what the ECB did (or did not). Having this in mind and looking forward, one may be sceptical if stocks could keep rising over the coming weeks. Once the price breaks out of the bullish channel, it could embark on a deeper pullback. Source: xStation5

In terms of information from companies we have not been offered any interesting ones recently. In the morning, BASF shares remain under pressure due to the continued slump of a water level on the Rhine, Germany - it poses a substantial supply chain risk for the company. Let us remind that the current level of water is 1.33 meters, a 1 meter down compared to the level a month ago. If the water level dips below 50 centimeters, all cargo could cease causing supply chain disruptions in many German companies.

BASF shares are under selling pressure on the back of the falling water level on the Rhine. Source: Bloomberg