WeeklyWatch – The ECB makes market-friendly moves

16 September 2019

Stock Take

Growth on the horizon

Last week saw a positive meeting of the European Central Bank in Frankfurt, where, following comments from the current Chief Economist at the Finance Ministry arguing that cheap borrowing via ultra-low global interest rates may validate a policy rethink, they dropped their 2019 growth and inflation forecasts for the eurozone. This was followed by a cut in the key interest rate to -0.5% and a pledge to buy $20 billion a month of eurozone debt to support growth and stability – making this the ECB’s largest monetary stimulus in more than three years, and the dramatic final act for President Mario Draghi, who is due to step down from his position later this year.

As you can imagine, investors were delighted when they heard the news, which resulted in eurozone bond prices rising, along with European stocks. However, the latter were then held back by worries over the banking sector.

Although few comments were made by investors when Draghi acknowledged that the committee had been divided on the last round of decisions, the same couldn’t be said for Bild, a major German daily, which complained that “Count Draghila is sucking our accounts dry”. Donald Trump also had his say on the matter, taking to Twitter to claim that the ECB was successfully pushing down the euro against the dollar, in turn aiding exports, while the Fed refused to budge.

Mark Dowding of BlueBay Asset Management said:

“By making QE extensions open-ended, we feel that QE-finity will be the focus of ECB policy from this point and we are inclined to think that this week’s cut in the deposit rate to -0.50% will be the last in the cycle. Over time, the emphasis may move more towards fiscal policy, but this will be a political decision and a transition which will only occur slowly in the case of Germany.”

While this was underway, economists also confirmed predictions of a recession in Germany, and Ursula von der Leyen announced her senior appointments for the new administration at the European Commission. During this process, she indicated that she wanted the Commission to play a more prominent role in global geopolitics and trade. This comes at the same time that Emmanuel Macron showed signs of wanting to pivot the EU more towards Russia, and against the usual backdrop of German nervousness over any kind of assertive foreign policy.

While in the UK

On home turf, the debate as to whether politicians are playing more of a role in supporting growth is firmly underway with an election potentially looming. On one hand, Sajid Javid has pledged increased spending in selected areas, while the Labour party is contemplating far more radical action using large-scale fiscal stimulus and an enforced transfer of a proportion of company shares to workers.

No matter how extreme this sounds, it’s unlikely to stay in the headlines for an extended period of time as Labour risks simply showcasing its internal divisions at the forthcoming party conference, which is also the case for the Tories. As is stands, the Lim Dems appear relatively united on the hot topic of Brexit.

As for the Prime Minister, he is awaiting the decision of the Supreme Court on whether his prorogation was illegal or not. Whatever the outcome will be, he made it clear over the weekend that he fully intends of the UK to leave the UK at the end of October, despite what parliament may have already voted.

How have the stocks changed?

When we take a closer look at the stocks, we can see that the pound strengthened on rising expectations that a no-deal Brexit will not matter, but the FTSE 100 appeared more sensitive to global events. On Friday, a Hong Kong bid for the London Stock Exchange was rejected, but this isn’t what moved our stocks most. What caused the most impact was the continued signed of a rapprochement of trade between China and the US. Here we saw Beijing suspended import tariffs on some US goods, and then the White House postpone the next round of tariffs by a fortnight. The US also suffered disappointing growth data. Despite this, the S&P 500 rallied over the week, which was assisted by the dismissal of the President’s National Security Advisor. This move initially pushed down oil prices but following a drone attack on Saudi oil facilities over the weekend this became irrelevant ad oil prices took their biggest jump since future began trading in 1988.

Wealth Check

As we all know, Brexit is playing havoc with many areas of the economy, and the possible impact of a no-deal Brexit is also troubling homeowners.

Last summer we saw house prices fall sharply, in which they continued their decline month-on-month until April this year. The economic uncertainty has affected the market since the referendum but has recently worsened. Let’s take a closer look at London, where fears of a ‘Brexit bubble’ are at their highest, and prices continue to fall. Both buyers and sellers have expressed their uncertainty by putting on hold their plans, causing sales to fall 12% year on year since the vote.

This stays in line with the prediction that Bank of England governor Mark Carney expressed last year where a no-deal Brexit would see house prices plummet. And the OBR has forecast that it would see 10% knocked off house prices by 2021.

With the Brexit drama expected to only increase in the coming weeks, we can expect to see even more uncertainty in the market, which will continue well into next year.

Paul Johnson, Senior Client Banking and Mortgage Manager at St. James’s Place stated:

“Now may be a good time to review your mortgage and consider fixing your rate before the Brexit deadline – falling bond yields will cut lenders’ costs which would lower borrowing rates.”

In the Picture

There are many variables in play when it comes to determining the outcome of Brexit, but last week we saw the possibility of a Northern Ireland backstop receive more attention.

Watch here as Azad Zangana, Chief European Economist at Schroders discusses whether this solution might enable a deal.

The Last Word

“The madder Hulk gets, the stronger Hulk gets.”

– Boris Johnson describes his role in Brexit negotiations

The information contained is correct as at the date of the article.

BlueBay and Schroders are fund managers for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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