Update

The market was prepared for a dovish outcome going into today’s European Central Bank (ECB) meeting and was therefore not disappointed. Unsurprisingly, the ECB left rates unchanged. The key change came from the forward guidance, with the ECB confirming that rates would be on hold at least through this year vs “through the summer” previously. They also confirmed that they would roll the existing long-term refinancing operations (LTRO) starting in September and lasting through to 2021, with details of it to be announced in due course. Lending operations will continue at least until March 2021 and following the first rate hike, QE debt will continue to be reinvested. Market participants had not expected some of these measures to be announced until the April meeting, so the real surprise today was that the timing was brought forward. During the press conference, growth forecasts were slashed for this year from 1.7% to 1.1%, for 2020 from 1.7% to 1.6% and unchanged for 2021 at 1.5%. Inflation was also revised lower for this year, from 1.6% to 1.2%, for 2020 from 1.7% to 1.5% and for 2021 from 1.8%to 1.6%. ECB President Draghi confirmed that today’s announced decisions were taken unanimously and are adding accommodation.

Market Impact

Upon the release of the statement, the EUR moved lower by approximately 30bps, while bonds and equities went bid. Bund yields are now close to 10bps, while the Eurostoxx is up +25bps on the day (at time of writing). The market is no longer pricing any hikes for this year. During the press conference, moves extended with Bund yields making their way to 0.08% and the EUR trading below 1.1260.

Asset Allocation Consequences

Today’s ECB meeting confirms the recent dovish shift we have observed from other G10 central banks. The real surprise today was not in the measures announced but rather in the timing (today vs later on). This shift can clearly be explained by the deceleration in macro and inflation trends, which we have witnessed via our proprietary Nowcasters (systematic measures that combine a large number of economic data series in real time). Our Growth Nowcaster currently remains above the zero line (above potential growth), but the developed world is decelerating. We were not surprised by the dovish turn that the Bank of Canada took yesterday, as our Canadian Growth Nowcaster is hinting at an entry into a recession for the country for the first quarter of this year. In Europe, if the deceleration continues at this pace for another two months, we are also likely to witness the Eurozone enter into a recession. Brexit uncertainties could also further weigh on the UK and the Eurozone. We remain positioned positively on growth assets for the time being, however, given the recent trend in our indicators, we have implemented hedges and remain cautious over the medium term. Bottom line, we believe growth-oriented assets will be at risk this year if the slowdown in the global economy continues to materialise. We believe that the equity market recovery we have witnessed since the beginning of the year is not about underlying fundamentals, which continue to deteriorate and disappoint, but due to technical factors that could easily reverse and also due to the recent dovish shift in central banks. We note, however, that the latter is becoming fairly priced by the market.