DAX Drops As ECB Disappoints With Limited Action

Trading Tips

No Rate Cut From ECB

The March ECB meeting held earlier today was the latest in a series of surprise outcomes that have taken place during the worsening COVID-19 outbreak. On the back of a slew of central bank rate cuts from the RBA, the Fed, the BOC and the BOE, the ECB was widely expected to announce a rate cut of its own today. While the bank did indeed announce fresh easing measures, it utilised tools away from the interest rate channel.

Such a move, especially given the coordinated response we are seeing from central banks, once again highlights the concerns held by many over the current scope of ECB easing and the room for further movements that can still have any effect. The ECB itself had been highly divided over the last few months of Mario Draghi’s tenure as to whether rate cuts or QE should be used to help combat sluggish Eurozone growth. Today’s decision shows that this division is clearly still in place.

Cheap Bank Loans & Increased Asset purchases Announced

Describing the outbreak of the virus as a “major shock” which will have a “significant impact on economic activity”, the new ECB chief announced that the bank would be offering even cheaper loans for banks (on rates as low as – 0.75%) while also expanding its asset purchase program. Lagarde explained that the move is intended to help provide easier liquidity for businesses along with capital relief for banks during the economic downside due to lockdowns currently underway across the Eurozone.

Many forecasters were looking for a 10-basis point reduction to the deposit rate. However, that rate is still sitting at record lows of -0.5%, suggesting that the level is already at or very near the ECB’s so-called reversal rate (the level at which further rate cuts are counterintuitive as they do more harm than good). On the asset purchase side of the decision, the ECB said that it will increase bond purchases through the end of 2020 by 120 billion EUR.

Lagarde Calls For Government Action

Today’s announcement from Lagarde, who also called on the need for “an ambitious and coordinated fiscal policy response” from European governments was also accompanied by a never-before-seen simultaneous move from the supervisory arm of the ECB which said it will allow some banks in the bloc to undershoot capital and cash requirements with a view to keeping liquidity flowing through the economy.

The response from the markets shows that investors are disappointed with the decision from the ECB. Bond yields across core and periphery nations have surged higher while asset markets have been continuing to sell-off. European asset markets have now fallen b over 30% in the last few weeks as the crisis continues to develop and as yet, show no sign of rebounding higher.

Technical Views

DAX (bearish below 10268.16)

From a technical viewpoint. The precipitous decline in the DAX over recent weeks has cleared several major levels to the downside. Currently the sell off is paused just ahead of the 92227 mid 2016 lows. However, a further drop is still the risk here with the 8687.75 2016 lows the next level to watch. In terms of any recovery, the first level to watch will be the 10268.16 level which sits as the key local resistance.

DAX Drops As ECB Dissapoints With Limited Action

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