It’s European Central Bank day and as Draghi’s days in office run thin, all eyes will be on the Bank at 12:45 BST. Markets continued their onslaught against global bond yields yesterday with European, US and UK treasuries rallying in a bid for safety. The market continues to price monetary easing into the Euro area and this afternoon’s decision and subsequent 45-minute press conference will validate or deny the market’s view.
Growth and inflation are at the centre of Europe’s issues and with the monetary tool kit looking empty, the Bank has seemingly limited ammunition to accelerate the economy and its prices. However, there’s nothing more powerful in central banking than your voice. Draghi found this out in July of 2012. The central bank chief, realising the immense risk to the Euro of soaring yields on peripheral members’ debt vowed to do ‘whatever it takes’ to save the Euro and restore calm.
No one knew what that meant at the time, but at the end of last year we’d learnt that it meant the purchase of 2.6 Trillion Euros of debt by the central bank, amassing one of the biggest balance sheets of all time and all for a central bank only a couple of decades old. Promising to do whatever it took immediately restored confidence and started huge momentum to restore yield spreads throughout the monetary union to normal levels.
We’re not in the same place as we were seven years ago on the European front – Greece doesn’t have to borrow money at a near 40% discount as it did back then, on the contrary the ten year note today leading into this decision commands a yield of just below 3%. However, signals towards the reintroduction of QE if necessary and generous lending rates to banks in its third round of the catchily-named Targeted Long Term Refinancing Operations (baby quantitative easing to you and me) will move markets.
The Euro has been hampered in the last couple of years by negative interest rates on deposit facilities causing investors to struggle to see its acquisition as a serious option. Whilst the super-cheap money has helped Eurozone equities to rally the currency still struggles. Loosening policy today, whilst reassuring to secondary market positioning, would force the Euro to slide further in its already depressed range as the fear of an ever-prolonged recovery develops further. If the bank holds its nerve and continues to see low inflation as transitional and temporary, expect decent Euro returns on the day.
South Africa is involved in its own Twitter war this week. Following appalling economic growth data for Q1 released early this week, the emerging market currency has been facing huge losses across the board. Posting the biggest Q1 contraction in a decade caused widespread concern of future recession. With SA current account data due to be read early this morning, markets will gain a better understanding of the complexion of the frightening data. Confirmation of downside risks will feed concern that the trade war’s impact on global growth is hindering export capacity and extend the Rand’s sell off – 9AM reading (Africa time – it might be a touch late).
The concerns of central banking have also precipitated a sell-off in the Rand this week. Enoch Godongwana, head of the ANC economic transformation subcommittee, might only 3,453 followers on Twitter but his exchanges with Ace Magashule (9,920 followers), ANC Secretary General, on social media yesterday caused upset to investors’ already fragile stomach for the Rand. A dispute over what the Reserve Bank can and should do is leaving the impression of a directionless central bank staring down the barrel of a potential recession. Eschewing risk in an already tense climate, South Africa’s Rand is on for a painful week.
Discussion and Analysis by Charles Porter