global perspectives

ECB president Draghi opens the door for more easing – We Expect Another Dose of QE

ECB president Draghi opens the door for more easing – We Expect Another Dose of QE
Salman Ahmed, PhD - Chief Investment Strategist

Salman Ahmed, PhD

Chief Investment Strategist

It appears the multitude of uncertainties are starting to catch-up with the European Central Bank (ECB). The ongoing US-China trade war, pressure on the market-based/multi-lateral global economic system, noted by Mr. Draghi) and cyclical slowdown are all combining to  make the case for additional central bank action , as inflation remains on a downward trajectory. 
 
We have long held the view that the ECB will not be able to hike in this cycle and today’s extension of forward guidance to mid-2020 is another indication that rates are likely to remain low for the foreseeable future. There was also talk of additional quantitative easing (QE) within the governing council, and ECB president Mario Draghi noted a moderate-size QE program remains practically possible. All in all, we think Mr. Draghi would prefer to see additional easing before he steps down in October, and policy slate for the new chair is already getting constrained as forward guidance has been extended further. The details of another dose of Targeted longer-term refinancing operations (TLTROs) were also announced with quite generous terms and the risk of a funding squeeze for the banking sector has been rightly averted. 
 
The trade war has been ramping up and the associated shock to confidence has led to a sustained contraction in global capex, alongside falling inflationary expectations. Consequently, we believe that the likelihood of another dose of QE that is focused on the corporate credit segment has risen and we think a policy announcement before October is very possible, especially if Governor of the Bank of Finland Olli Rehn continues to gather pace as the key front-runner for the ECB chair slot. This implies downward pressure on European rates will remain high, whilst the euro will suffer against G4 currencies.  The extent of the damage against the USD will partly depend on how quickly will the Federal Reserve move towards a sustained cutting cycle in coming months.

important information.

This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, L-1150 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended.
Lombard Odier Investment Managers (“LOIM”) is a trade name.
This document is provided for informational purposes only and does not constitute an offer or a recommendation to purchase or sell any security or service. It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful. This document does not contain personalized recommendations or advice and is not intended to substitute any professional advice on investment in financial products. Before entering into any transaction, an investor should consider carefully the suitability of a transaction to his/her particular circumstances and, where necessary, obtain independent professional advice in respect of risks, as well as any legal, regulatory, credit, tax, and accounting consequences. This document is the property of LOIM and is addressed to its recipients exclusively for their personal use. It may not be reproduced (in whole or in part), transmitted, modified, or used for any other purpose without the prior written permission of LOIM. The contents of this document are intended for persons who are sophisticated investment professionals and who are either authorised or regulated to operate in the financial markets or persons who have been vetted by LOIM as having the expertise, experience and knowledge of the investment matters set out in this document and in respect of whom LOIM has received an assurance that they are capable of making their own investment decisions and understanding the risks involved in making investments of the type included in this document or other persons that LOIM has expressly confirmed as being appropriate recipients of this document. If you are not a person falling within the above categories you are kindly asked to either return this document to LOIM or to destroy it and are expressly warned that you must not rely upon its contents or have regard to any of the matters set out in this document in relation to investment matters and must not transmit this document to any other person. This document contains the opinions of LOIM, as at the date of issue. The information and analysis contained herein are based on sources believed to be reliable. However, LOIM does not guarantee the timeliness, accuracy, or completeness of the information contained in this document, nor does it accept any liability for any loss or damage resulting from its use. All information and opinions as well as the prices indicated may change without notice. Neither this document nor any copy thereof may be sent, taken into, or distributed in the United States of America, any of its territories or possessions or areas subject to its jurisdiction, or to or for the benefit of a United States Person. For this purpose, the term "United States Person" shall mean any citizen, national or resident of the United States of America, partnership organized or existing in any state, territory or possession of the United States of America, a corporation organized under the laws of the United States or of any state, territory or possession thereof, or any estate or trust that is subject to United States Federal income tax regardless of the source of its income.
Source of the figures: Unless otherwise stated, figures are prepared by LOIM.
Although certain information has been obtained from public sources believed to be reliable, without independent verification, we cannot guarantee its accuracy or the completeness of all information available from public sources.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by LOIM to buy, sell or hold any security. Views and opinions are current as of the date of this presentation and may be subject to change. They should not be construed as investment advice.
No part of this material may be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorised agent of the recipient, without Lombard Odier Funds (Europe) S.A prior consent.
©2019 Lombard Odier IM. All rights reserved.