June ECB Meeting

Backdrop

The ECB left rates unchanged at today’s meeting but revised its forward guidance. Rates will likely remain at present levels at least through the first half of 2020, an extension on previous guidance to the end of 2019. Regarding TLTRO III (targeted longer-term refinancing operations), new bank loans will be +10bps higher than the main rate.

On a slightly more hawkish note, the ECB did not qualify its guidance on rates by adding “or lower”, as expected.

During the press conference, Draghi unsurprisingly confirmed that risks to the euro area were tilted to the downside. Interestingly, the ECB revised both growth and inflation forecasts higher for this year. It sees 2019 GDP moving from 1.1% to 1.2%; 2020 GDP, from 1.6% to 1.4% and 2021, from 1.5% to 1.4%. Inflation forecasts for this year moved to 1.3% from 1.2%, 2020, from 1.5% to 1.4% while 2021 was left unchanged.

Draghi said that the probability of a recession was low and that there were no threats of derailing inflation expectations. He also confirmed that some officials raised the possibility of rate cuts.

 

Market Impact

Following the rate announcement, the euro saw some choppy price action but is trading better bid, rates are a touch higher and European equities retreated from their intraday highs.

During the press conference, these moves extended further as the near-term outlook, notably around growth and inflation forecasts, was a positive surprise for the market.

The market impact is not surprising given the dovish expectations and positioning going into the meeting. However, what we find interesting is that good news seems to be bad news for the market. A clear illustration of this was when Draghi mentioned that the risk of a recession was low, prompting the equity market to retreat further. This also highlights the significant influence central banks have had on the market since the beginning of the year.

Asset Allocation Consequences

Today’s ECB meeting is yet another confirmation that central banks are making steps towards further accommodation rather than tightening.

Last year, the macro picture was deteriorating while the geopolitical landscape was improving; today we are witnessing the opposite. Macroeconomic conditions as monitored by our Growth Nowcasters seem to be stabilising for now, however we note that dispersion is high with clear outperformance in the US while the Eurozone remains weak. It therefore seems that central bank dovishness is currently driven by geopolitics and their willingness to be pre-emptive rather than reactive to maintain growth momentum. This was confirmed by the Reserve Bank of Australia at their last meeting and recent comments by US Federal Reserve speakers.

Our medium-term view remains cautious. Given the recent stabilisation in the macro picture and inflation not posing any threats at this stage, we remain long growth assets but with hedges. The recently escalating trade war has impacted sentiment and raises serious questions on the effect it could have on global growth, making protection warranted.


Important Information

This document is provided to you on a confidential basis and must not be distributed, published, reproduced or disclosed, in whole or part, to any other person.

The information and data presented in this document may discuss general market activity or industry trends but is not intended to be relied upon as a forecast, research or investment advice. It is not a financial promotion and represents no offer, solicitation or recommendation of any kind, to invest in the strategies or in the investment vehicles it refers to. Some of the investment strategies described or alluded to herein may be construed as high risk and not readily realisable investments, which may experience substantial and sudden losses including total loss of investment.

The investment views, economic and market opinions or analysis expressed in this document present Unigestion’s judgement as at the date of publication without regard to the date on which you may access the information. There is no guarantee that these views and opinions expressed will be correct nor do they purport to be a complete description of the securities, markets and developments referred to in it. All information provided here is subject to change without notice. To the extent that this report contains statements about the future, such statements are forward-looking and subject to a number of risks and uncertainties, including, but not limited to, the impact of competitive products, market acceptance risks and other risks.

Data and graphical information herein are for information only and may have been derived from third party sources. Although we believe that the information obtained from public and third party sources to be reliable, we have not independently verified it and we therefore cannot guarantee its accuracy or completeness. As a result, no representation or warranty, expressed or implied, is or will be made by Unigestion in this respect and no responsibility or liability is or will be accepted. Unless otherwise stated, source is Unigestion.

Past performance is not a guide to future performance. All investments contain risks, including total loss for the investor.



Geneva

UNIGESTION SA 8C Avenue de Champel PO Box 387 1211 Geneva 12 Switzerland +41 22 704 41 11 clients@unigestion.com


Zürich

UNIGESTION SA - Zürich Branch Sihlstrasse 20 8021 Zürich Switzerland + 41 44 220 16 00 clients@unigestion.com


See locations >

Contact us