Fresh Liquidity Injection
European asset markets have been given a fresh boost this week, with the ECB announcing that it will increase the size of its bond-purchase program by 600 billion EUR. The bank’s recently launched Pandemic Emergency Purchase Program (PEPP) will now run at 1.35 trillion EUR in total. The program, which will run through June 2021, means the ECB is now on course to purchase. Record 1.4 trillion EUR worth of assets this year, with its balance sheet swelling to 4 trillion EUR in total.
Commenting on the need for such measures, ECB chief Lagarde explained: “There has been an abrupt drop in economic activity as a result of the coronavirus (COVID-19) pandemic and the measures to contain it. Severe job and income losses and exceptionally elevated uncertainty about the economic outlook have led to a significant fall in consumer spending and investment.”
Growth & Inflation Forecasts Slashed
The ECB is now forecasting Eurozone growth to contract by 8.7% this year, a fresh low in the post-war period, before rebounding to growth of 5.2% in 2021 and 3.3% in 2022. However, the forecast comes with a dire warning as Lagarde noted that a further outbreak of COVID-19 could see growth falling by as much as 12.6% this year if lockdowns need to be reintroduced.
The bank’s inflation forecasts were equally dismal with CPI expected to fall to just 0.3% this year before rebounding to 0.8% next year and 1.3% the year after. As such, the bank’s 2% inflation target remains well out of reach over the forecast horizon meaning that interest rate expectations will remain firmly anchored.
While Lagarde was keen to point out that there had been a “bottoming out” of the downturn over the last month, the subsequent recovery has been “tepid” compared with the pace of the downturn itself. With inflation hit hard by the collapse in energy prices, Lagarde noted that prices would likely “remain subdued” as a result of the severity of the economic crash, which was greater than initial projections.
Lagarde in Control (For Now)
In all, Lagarde’s handling of the crisis so far has been praised for her decisive actions and aggressive actions. The PEPP announced by the ECB just under three months ago has now almost doubled in size and is set to run for a further six months beyond the initial deadline, providing further reassurance for the economy. The main test for Lagarde now will be over the coming months and whether the recovery continues to gather pace or, in the event of a second wave, takes a further leg lower which could create incredibly complicated conditions for the ECB.
DAX (Bullish above 12328.47)
From a technical viewpoint. The DAX continues to push higher within the bullish channel and has now broken back above the yearly pivot at 12328.47. With VWAP positive now, the near- term view remains bullish. The next upside level to watch is the 12916.11 retest of broken lows, where we also have the channel top, ahead of the 2020 highs at 13744.70
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