Market concerns persist, and there seems nothing in the short term that will change this. In fact, the latest ECB Financial Stability Report gave evidence of the nest of problems and risks in which we have found ourselves for some time, while recalling the downside balance of current risks, analysts at Intermoney point out.
Axel Botte (Ostrum AM) | Equity markets resumed rising last week. European indices gained as much as 2.5%. The rebound in bank stocks appears traceable to Mario Draghi’s comments hinting at possible changes to the deposit facility rate scheme. Equity markets were also upbeat in Asia and in North America.
Intermoney | The president of the ECB opened the door to further stimulus if the economic and inflation perspectives in the Eurozone remain low, in the shadow of a scenario dominated by downside risks for activity. In fact, he recalled that “there is no lack of instruments” to fulfill his mandate, at the same time as he is contemplating new delays in raising interest rates. Textually he said: “we are assured that monetary policy continues to accompany the economy, adjusting our orientation on interest rates to reflect the new inflation perspectives”.
The ECB changed their forward guidance in yesterday’s meeting, signaling the hold in rates “at least to the end of 2019” along with a new round of TLTROs, in order to keep the credit flowing. Dave Lafferty, chief strategist at Natixis IM, reports: “If you were waiting for evidence that European monetary policy has turned the corner, you’ll definitely be disappointed… if not surprised.”
At its Governing Council meeting today, the European Central Bank is expected to confirm the termination of the asset purchase programme by the end of December 2018. The expiry date had so far been subject to incoming data and the medium-term inflation outlook. While incoming data in the past weeks has been rather disappointing, economists at Julius Baer see the solid credit activity as a valid reason to stop asset purchases.
The ECB will not start the normalization of its monetary policy in 2019. This is the bet of Philippe Waechter, chief economist at Ostrum AM (affiliated to Natixis AM). He also thinks that the interest rate level will remain stable, that the refi rate and the deposit rate will remain at the current level in 2019.
Israel Rafalovich (Brussels) | Mr. Draghi urged action through organisations such as the WTO to address variations in tax regimes, take a stand on labour regulations and put in place tougher rules for cross border finance. Mr. Draghi pointed out that in order to accomplish that the EU would have to strengthen it own institutions including setting up a country risk sharing institution for the of the 19-country euro zone.
From 2019 it is possible that Spain will have difficulties financing its public debt, which is definitely not only the official figure of 98.3% of GDP. Rajoy’s increase of this debt by €649 billion has been financed at very low interest rates, thanks to the ECB’s quantitative easing. On the other hand, Pedro Sánchez has announced substantial spending increases, which will inevitably increase debt in 2019.
The twentieth anniversary of the creation of the ECB coincides with renewed financial tensions in the Eurozone. According to Caixa Research, the irreversability of the single currency requires ambitious advances in the European project.
For a long time, Spain has had a “debt pending” in terms of budgetary stability. And, for the time being, the current scenario leads us to think that balancing the public finances is a difficult objective to achieve in the medium-term. Added to that problem is the high level of government debt.