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 prepared by Lombard Odier Funds (Europe) S.A. and is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393. This material is provided for information 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 material 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. Past performance is no guarantee of current or future returns. This material is the property of LOIM and is addressed to its recipient 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. This material contains the opinions of LOIM, as at the date of issue.

©2017 LOIM. All rights reserved.