European Markets Open Lower After ECB Bond-Buying Shift

22 Jan 2021 · 3rd Party Analysis

WRITTEN BY ThorFX

In Summary

  • ECB in a race against time to stimulate the European economy
  • Increasing restrictions imposed across the globe

The European Central Bank is racing to respond to a surge in coronavirus infections that could drag the eurozone economy into a double-dip recession. Yesterday, ECB President Christine Lagarde announced that the bank will not change interest rates or its main stimulus policy of a nearly €2 trillion bond-buying program.

The key question now that bothers investors is whether the ECB will use the full amount that is dedicated to its emergency bond-buying program. The key factor that determines the pace of its bond purchases is the concept of favorable financing conditions. This question was asked repeatedly to President Christine Lagarde during yesterday’s meeting. In response, Ms. Lagarde said it doesn’t depend on one indicator, but it is rather a mix of many different factors such as banking, lending rates, household borrowing rates, government bond yields, corporate credit. In her words, the ECB looks holistically at all of these factors to decide whether financing conditions are still favorable and therefore whether it needs to increase or reduce its bond-buying purchases. On the inflation front, at present, the concern is that it is significantly low. Inflation has been negative for the past five months and prices have been falling. This is one of the reasons for the ECB to target favorable financing conditions as a way to stimulate demand which should then lead to increasing inflation.

Ambitious Goals Set for Vaccination Rollouts in Europe

Market participants expect this year to mark a sharp rise in inflation once the vaccination rate picks up. The EU has set the ambitious goal to vaccinate the majority of people against coronavirus by this summer. As a result, European governments expect this to lead to the lifting of the restrictions that have been imposed on the back of a very strong rebound in confirmed Covid cases.

The coronavirus pandemic continues to produce rising cases as European countries are considering stricter lockdowns. German Chancellor Angela Merkel announced yesterday that Germany could close its borders. UK Prime Minister Boris Johnson also signaled a possible third UK lockdown that could last into summer. US President Joe Biden said he will “move heaven and earth” to vaccinate 100 million Americans in the next 100 days. He also warned that 100,000 may die in the next month.

The seemingly never-ending and consistently increasing coronavirus restrictions around the world pushed European markets lower today. All major European indexes are trading in the red in the initial trading hours. DAX, FTSE, and CAC all share a drop of nearly 0.50% each as investors have taken the risk-off approach this morning. US equity futures are also off in premarket trading.

The session on Thursday did not yield fruitful results on both sides of the Atlantic. European trading yesterday ended in negative territory for Germany, France, and the UK. The CAC40 was the biggest loser, down by 0.67%. The UK’s FTSE100 closed lower by 0.37%, while the German DAX skittered down by 0.11%. The US markets on Thursday closed little changed as the Dow Jones Industrial Average moved lower by 0.04%, the S&P500 rose modestly by 0.03%. The Nasdaq Composite Index closed higher by 0.55%.

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