Risk assets are trading higher this morning, with financials and commodity-exposed names faring best on the UK 100 index. This in the wake of what was – to say the least – a volatile market reception to yesterday’s hotly anticipated ECB policy update. QE was boosted by more than expected. It now includes a wider scope of assets available for purchase than before. Rate cuts were over and above what was anticipated. And the cherry on the cake was some nice TLTRO carrots (carry-trade, free money if the banks lend lots) to offset another crack of the negative deposit rate stick, which banks have been complaining about. Overall the update is net positive and thus supportive of risk appetite in the near term.

Yesterday’s impressive asset price swings show market obsession with low rates continues and is overdone, especially when you consider how much more complicated the monetary policy machine has become. Policy is no longer as simple as just low rates. And Mario clearly showed that he will indeed do whatever it takes to help restore growth and inflation in a struggling Eurozone.

In the meantime, don’t forget 1) we still have the possibility of more ECB QE and an even bigger basket of assets to choose from should Mario & Co wish; 2) The Fed is extremely unlikely to hike again anytime soon to exacerbate global monetary policy divergence given the reaction to its last move and US data blowing hot and cold (even if Draghi would surely welcome any USD strength to send the EUR lower after he undid all his hard with unnecessary comments about no further rate cuts) and 3) Draghi’s latest move has the potential to result in a double-whammy; a boost to risk-asset prices (QE) to keep market sentiment up as well as doing what should be considered even more important – delivering a real incentive to the banks to engineer real help into the real economy (TLTRO).

Mike van Dulken, Head of Research, 11 Mar