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Draghi Offers ‘Mixed Blessing’ to Stock Traders, But No Panacea

Draghi Offers ‘Mixed Blessing’ to Stock Traders, But No Panacea

(Bloomberg) -- The European Central Bank announcement reassured investors that monetary officials were serious about supporting the economy, but offered little long-term relief to banks.

The Stoxx Europe 600 climbed as much as 0.8%, before turning negative, after the ECB reduced the deposit rate and said it’ll start open-ended bond purchases. Defensive sectors led the advance as bonds rallied.

Bank investors were especially confounded by today’s newsflow, initially lifting the industry’s Stoxx Europe 600 Banks index following the introduction of deposit tiering and later erasing the optimism as Morgan Stanley said the partial relief measures are “far from a panacea.”

Draghi Offers ‘Mixed Blessing’ to Stock Traders, But No Panacea

Here’s what market players surveyed by Bloomberg said about the ECB measures:

Lars Kreckel, Legal & General

“There’s a mixed blessing: the negative of lower bond yields and the positive of ‘positive for EMU macro’ reflected in lower periphery spreads. Would have thought the drop in bond yields weighs more heavily.
If banks continue to outperform, then it tells us that sentiment is bearish and expectations low. The latter was also evident in how well banks have held up with the drop in Bund yields yesterday.”

Ben Jones, State Street Global Markets

“The statement is better for banks than I expected but I don’t think it’s a game changer for the sector. The duration of the asset purchases is what the market is focusing on. The amount of QE is a little disappointing but that it doesn’t have an end date is seen as a positive.”

Magdalena Stoklosa, Morgan Stanley

“Today’s release in our view has some marginal positives but is far from a panacea for banks’ profitability. We remain defensively positioned in the European banks, as we believe the sector will fundamentally perform only as we reach a plausible lower bound of the interest-rate cycle.”

Alfonso Benito, Dunas Capital

“Draghi is showing he wants to protect the banks, but tiering is just a gesture he can do for them. Fundamentals for banks don’t change and they remain in a very weak position.”

Jasper Lawler, London Capital Group

“We’re quite caught aback by the accelerated timing of ECB stimulus. The drop in the euro suggests markets see this decision as an over-delivery. We thought President Draghi was more likely to leave kick-starting QE to incoming President Lagarde. The ECB clearly see the low growth and inflation environment as something that can’t be delayed further.

With tariff concessions from the U.S. and China, today’s moves from the ECB and if the Fed cuts rates too next week, the macro environment suddenly looks a lot rosier.”

Rosie McMellin, Fidelity International

“While both the deposit cut and the amount of monthly purchases fall short of market expectations, this is more than outweighed by the changes to the forward guidance and open-endedness of the measures. Today’s package will likely reinvigorate the hunt for yield, and we would expect credit markets to rally."

Holger Schmieding, Florian Hense, Berenberg

“Will the more aggressive ECB stance make a difference? Not much. Amid such pervasive uncertainty, even lower financing costs for households and companies will not raise consumption and/or business investment significantly.

At the margin, the ECB is making it easier for governments to finance the modest fiscal expansion which they are planning anyway. More importantly, the ECB is containing the downside risks. The very accommodative stance of monetary policy makes it unlikely that the economic downturn could spark significant financial turbulence, which in turn could otherwise exacerbate the downturn."

--With assistance from James Cone, Beth Mellor, Sam Unsted and Namitha Jagadeesh.

To contact the reporters on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net;Macarena Munoz in Madrid at mmunoz39@bloomberg.net;Michael Msika in London at mmsika4@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon, Paul Jarvis

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