Draghi hints at more stimulus; Stocks jump and EUR falls

Summary:

• Dovish message from Mario Draghi during Sintra speech

• ECB president opens the door for rate cuts and more QE

• EURGBP pulls back from 5-month high; DE30 jumps 200 points

The start of the week had a feeling that the markets were in a wait-and-see mode ahead of Wednesday’s Fed rate decision with traders eagerly anticipating a policy update as speculation mounts that the US central bank are set to begin cutting rates for the first time in over a decade. However, there’s been a flurry of activity in the past hour as ECB president Draghi has threatened to steal the Fed’s thunder with a strongly dovish message of his own.

Selected comments were as follows:

• More rate cuts are part of the central bank’s toolkit

• QE still has considerable headroom

• If outlook doesn’t improve, additional stimulus is needed

• In the coming week, we will deliberate how our instruments can be adapted commensurate to the severity of the risk to price stability

• Negative rates have proven to be a very important tool

Mr Draghi has underlined his readiness to take further action to stimulate the eurozone economy during a speech in Sintra and there’s been a notable reaction in the market with the single currency dropping back and stocks on the continent rallying. The markets are now pricing in a 10 basis point cut before the end of the year and it seems that once more we’re getting a concerted effort from major central banks to prop up the global economy.

The EURGBP has been trending higher for several weeks now but the comments from Draghi may provide a longer term turning point around 0.8975. Source: xStation

The Pound has bounced strongly against the Euro after earlier hitting a 5-month low while stocks in London have also responded positively with the FTSE following the move higher seen in European bourses.

One of the most dramatic moves can be seen in the German Dax, with the market bouncing strongly by as much as 200 points after earlier trading at its lowest level in over a week before Draghi spoke. Source: xStation  

Not long after the Draghi remarks, there was the release of the latest German ZEW economic sentiment which showed a far worse than expected reading. The print of -20.2 was well below the -3.6 consensus forecast and marked a sharp drop on the -1.6 seen previously. What is more, after 3 consecutive beats this indicator has now missed estimates in the past 2 releases and seems to be starting to disappoint once more. This data has done little to cap the advance seen in the Dax, with the market potentially now seeing bad news as good, with the proviso that a worsening economy will cause the ECB to deliver further stimulus.

The latest ZEW economic expectations were disappointing and they point to a falling confidence in the German economy. Source: XTB Macrobond