The ECB decided to stay put on stimulus, with attention now turning to the Federal Reserve meeting
Global markets are trying to stabilize (S&P500:+1.3% on Monday) following a c.10% peak-to-trough drop in US Technology equities in four days (see graph page 3), with US Technology stocks underperforming in a downward trending market. Indeed, the S&P500 has dropped by 6.7% since its peak (3581) in September 2nd also due to the Oxford/AstraZeneca vaccine setback (albeit with trails expected to resume) along with oil prices which have fallen by 12% during September, dragging down Energy equities. Volatility has also increased, with the VIX Index at 27% from 20%.
Year-to-date, laggards fared better during the correction, with euro area equities up by 1.8% wow. Regarding sectors, Energy declined by 8% with Defensives (Staples, Healthcare, Utilities) over-performing on a relative basis. Post-Tech correction and with equity absolute valuations (Price to Earnings) still at elevated levels, investors’ attention turned to (i) Covid19-related data (infection/hospitalization/mortality rates and medical developments); (ii) the US fiscal impasse; (iii) US elections and (iv) central banks’ meetings.
With that being said, the ECB’s meeting on Thursday was broadly uneventful. Key interest rates were left unchanged (Main Refinancing Operations: 0% and Deposit Facility Rate: -0.5%), as expected. Regarding balance sheet policies, both regular and pandemic-related programmes will continue as expected (see Economics).
The ECB acknowledged the improvement in economic activity during the summer months, whilst warning staying cautious about the significant uncertainty ahead, conditioned on Covid-19 developments. The appreciation of the euro exchange rate was “discussed extensively” with exchange rate developments being “monitored carefully” given the impact of a stronger FX on the back of the central bank’s capacity to bring inflation back to its goal, according to President Lagarde. The ECB stands ready to adjust all of its policy instruments, as appropriate, to ensure that inflation moves towards its goal of close to but below 2%, albeit with the consensus (and we) having expected more concrete indications that the Governing Council will provide additional stimulus in the forthcoming meetings. None of the main dovish risks were materialized (signaling for more stimulus via PEPP expansion and interest rate cuts, EUR jawboning) and as a result, the EUR ended the session slightly higher by 0.5% at $1.187 against the USD (+0.1% wow).
Central bank meetings in other developed economies are expected to take place during the second half of September (Federal Reserve, Bank of England, Bank of Japan). This week’s FOMC meeting (Wednesday) will be the first one in which the Committee is being guided by the new framework (see Global Markets Roundup released September 1st). Since mid-March, the FOMC’s Treasury and MBS purchases have totaled $390 bn per month on average ($106 bn per month on average since July) and rate guidance has been that the Fed will maintain interest rates near 0% until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals. Following the adoption of a flexible average inflation targeting (AIT) under the new framework, the FOMC could alter its forward guidance, linking asset purchases and interest rate evolution with specific inflation-based and employment-based outcomes.