The European Central Bank (ECB) President Mario Draghi triggered a rally across European equity and bond markets when he said that the apex bank was prepared to cut interest rates or buy more eurozone debt if growth failed to pick up.
The remark sent the euro sliding against the dollar. The eurzone currency is trading at around 1.12 per dollar, down about two-tenths of a percent. Bond yields across Europe have also slipped to all-time lows. Yields on 10-year bonds from most major eurozone member economies are in the negative. European equities have cheered Draghi's stimulus hint. The DAX, the CAC and FTSE are trading with strong gains.
While European investors are pleased with Draghi's comments, his signals have not gone down well with US President Donald Trump. Taking to Twitter, Trump said, “Mario Draghi just announced more stimulus could come, which immediately dropped the euro against the dollar, making it unfairly easier for them to compete against the US. They have been getting away with this for years, along with China and others.” Trump went on to add that “European markets rose on comments unfair to US made today by Mario D!”
Just a short while ago the US president also tweeted about his telephonic interaction with Chinese President Xi Jinping. “Had a very good telephone conversation with President Xi of China. We will be having an extended meeting next week at the G-20 in Japan. Our respective teams will begin talks prior to our meeting,” Trump said. The comment has sent equities on Wall Street higher; the DOW, the S&P and the Nasdaq are all trading with strong gains.
In an interview with CNBC-TV18, Managing Partner of Geosphere Capital Management Arvind Sanger and Independent Market Commentator Geoffrey Dennis spoke about Draghi’s stimulus signal.
According to Sanger, central bankers have become sensitive to signs of slowdown. “France and Germany had terrible first quarter numbers and the second quarter is not any better. Britain has also slowed down dramatically, although the ECB is not directly influenced by that. Given the Brexit mess, the economic problems across Europe and the lack of inflation, it looks like Draghi is willing to do whatever it takes, which was his famous quote a few years ago when he first set off the quantitative easing,” he added.
Sanger expects a dovish message from the US Fed as well. “The Fed is not expected to do anything today. But my sense is they will pivot to a much more dovish kind of message. Clearly inflation is not going anywhere, growth is not going anywhere and this is providing support. If Trump and Xi can have a good meeting, the markets clearly will like the fact that there are so many things that are providing a put for the market in terms of growth slowdown that the central bankers are ready to ride to the rescue,” he said.
Dennis said the global economy could be heading towards a significant slowdown. “What is interesting about the ECB comments and Trump’s tweets is that all it has really done is pushed the dollar slightly higher. We are well within the recent trading range. It is not likely to push the dollar to very strong levels. The generally firm level of the dollar recently has really been a major factor for the underperformance of emerging markets,” he added.
“If we get a slowdown in the US which leads to the Fed easing – cutting rates which I think is probably what is going to happen and the dollar weakens, emerging markets will do very well. However if we go into a full-fledged recession, which I think there is a decent chance, then there is always a flight to quality. So, I think a slowdown is fine for the emerging markets but a full-fledged recession is not, this is why emerging market investors are watching the global economy very carefully,” Dennis added.