Market Observers Give Cautious Thumbs Up to Lagarde: Street Wrap

(Bloomberg) -- Market players have given an early -- if cautious -- thumbs up to the prospect of International Monetary Fund Managing Director Christine Lagarde taking over as head of the European Central Bank.

Lagarde is viewed as less hawkish than other contenders for the job, including Bundesbank President Jens Weidmann and Bank of France Governor Francois Villeroy de Galhau. She is expected by many to support the same kind of accommodative policies as Mario Draghi, whom she has been tapped to succeed.

The euro pared its gains slightly as news of Lagarde’s nomination broke, although the move was limited, and bund futures advanced. European stock and bond markets were closed at the time.

Lagarde was nominated by European Union leaders on Tuesday after a brutal final round of horsetrading, that also included wrangling over other top EU jobs. The IMF boss, who was seen as a front-runner just before the announcement, has been characterized by some market participants as “credible,” and neither too hawkish nor dovish.

Here’s what some market observers, speaking both before and after the official announcement, said about Lagarde:

Toronto-Dominion Bank

Lagarde would have “credibility” if Europe faces another downturn, according to Ned Rumpeltin, the European head of currency strategy at Toronto-Dominion Bank.

• “She is very well connected at the political level to her counterparts within the region and more broadly. We think that could be very important if and when the euro area faces a deeper slowdown.”

Principal Global Investors

Global investment strategist Seema Shah sees Lagarde following Draghi’s lead with further monetary stimulus and “this should weigh on the euro in all likelihood.”

• Lagarde’s appointment is “undoubtedly positive” for Italian bonds and should put further downward pressure on German yields, though scope for further bund gains is “limited at these levels,” she said.

EdenTree Investment Management

Lagarde is well-suited to be ECB President at a time when the central bank needs to implement more expansionary policies and strengthen the banking system, says Chris Hiorns, fund manager at EdenTree Investment Management.

• Lagarde was early proponent of quantitative easing for the euro zone and warned of impact of tighter monetary policy earlier; she also proved more flexible than the EU in negotiations with the Greek government during the sovereign debt crisis, Hiorns said.

Credit Agricole

Volatility in the euro may spike if Lagarde is the next ECB President as she has spent her career outside the central bank, according to Credit Agricole head of G-10 strategy Valentin Marinov.

• “The biggest worry with Draghi’s succession is the question whether the new president will be able to build consensus that is needed to implement potentially controversial policies”

Arbuthnot Latham (a U.K. private bank)

Investor sentiment toward Lagarde is positive. She is credible, has held senior posts, and could be seen as a good French counter-balance to any perceived German over-influence, reckoned Gregory Perdon, co-chief investment officer at Arbuthnot Latham.

• “She doesn’t appear to come to the party either too hawkish nor too dovish, in fact maybe she’ll be just right.”

CIBC

Her nomination is “knee-jerk” bearish for the euro as it suggests ECB Chief Economist Philip Lane’s influence has been turned up a notch, according to Bipan Rai, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce.

• “Lagarde is a politician and likely to rely heavily on ECB staff.” Lane’s most recent speech signaled asset purchases.

--With assistance from Samuel Potter, Alyce Andres, Justina Lee and Katherine Greifeld.

To contact the reporters on this story: Charlotte Ryan in London at cryan147@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net

To contact the editors responsible for this story: Samuel Potter at spotter33@bloomberg.net, Benjamin Purvis, Jenny Paris

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