ECB prepares for global recession?

07 September,, Vilnius – Last Thursday’s ECB meeting has surprised the market with an increase of Emergency Liquidity Assistance (ELA) from 25% to 33%. Does the ECB prepares for global recession?

Dovish message

The key takeaway from Thursday’s ECB meeting was the Governing Council’s “willingness to do more, readiness to do more and its ability to do more”. The dovish note was received and priced in the markets resulting in a broad-based rally in fixed income as well as the stock markets and expensive EUR depreciation, which was surely on ECB’s mind.

The Governing Council judged to be “premature” to conclude the downside effects on growth and inflation expectations. However, the market participants have now increased expectations for the ECB QE further extension or scale-up beyond September 2016.

Stock market

It would seem the ECB is the place to turn to for a policy reply that could reinforce risk markets as neither Chinese policymakers nor the Fed give the impression to be able to. The expectations of further easing from the ECB might provide solid ground for stocks. Yet, providing the global stock market fears and uncertainty linked to the world’s second biggest economic engine – China, the Dax index might still remain erratic.

Nevertheless, one of the ways the ELA increase could be viewed is as a possible precaution for a global recession.

Danske Bank outlook

ECBFollowing the event, the bank sees a continued rally in fixed incomes and a short-term downside for bond yields. In the longer-term, however, Danske expects yields to rise once more when the Fed will begin a rate hike cycle and the global growth gets back to its potential during the next year.

“The dovish statement from the ECB sent EURUSD lower and we expect the divergence in monetary policy to drag EURUSD lower still in coming months. Our forecast is 1.10 in 3M from the current level of 1.115,” Danske Bank finished.

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