ECB takes a more scenic route towards the exit

The ECB is still slowly grinding its way towards the exit, with the emphasis on ‘slowly’. That’s the overarching takeaway from this month’s European Central Bank information dump and commentary. The main market beneficiary was European equities. Germany’s DAX in particular saw a rebound in risk appetite on Thursday having been in the red before the ECB released its statement. Investors were tempted back into the market as the euro failed to sustain a bounce amid ECB President Mario Draghi’s determinedly dovish tilt, and perhaps also by a slight softening of White House rhetoric on tariffs.

The first possible confirmation that Thursday’s proceedings were not going to be radical was a singular change—in line with expectations—of the central bank’s textual statement. The removal of words declaring the bank’s willingness to increase the size of its monthly bond buys was amongst the most on-the-radar expectations ahead of Thursday. The bank had continued to point to a likely removal even amid a spate of recent anonymised comments confessing cold feet about signalling definitive completion of asset purchases by year end. Euro buyers treated the removal according to its appearance: a hawkish sop in a dovish statement. In fact, they did so at Draghi’s intimation. The dropped words did "not signal” any change “in expectations or reaction function" he said at the press conference. A modest run-up by the single currency during the event duly ended as Draghi stressed geopolitical risks, continuing need for an “ample degree of monetary stimulus”, and even that any revival of inflation after bond buying ends would be “supported” by ECB measures.

All in, the ECB took the line of least resistance at its March meeting, and that was opportune for European stock markets that have been battered by the sudden appearance of U.S. trade tariffs, another potential wage growth shock in U.S. employment data coming on Friday, and Italy on the backburner but still on watch. In terms of potential longer-lived market reaction, it was notable ahead of Thursday that institutional expectations had ramped significantly compared to a year ago, and even more over two years, looking at the forward EONIA curve, a gauge of interbank rate expectations. Such anticipation tends to cascade down cross-market wise, so depending on how long the ECB continues to hover around the exit without going through, the euro may have to soften further. In turn, that could open up further breathing space for European shares.