European Markets Search for Direction After Lagarde Speech

31 Mar 2021 · 3rd Party Analysis

WRITTEN BY ThorFX

In Summary

  • European equities lag buying momentum as investors take up a risk-off approach to markets
  • ECB President Christine Lagarde vows to step up the pace of bond-buying programme

European equity trading on Wednesday could not keep up with yesterday’s gains across the board. While investors remained focused on repositioning their portfolios for a global economic recovery on Tuesday, the situation today appears somewhat uncertain as the risk-off mood has prevailed. 

Similarly to US investors rotating into cyclicals this quarter, real-economy sectors in the European markets have advanced significantly, compared with technology and other growth stocks. The banking sector of Europe’s Stoxx 600 index has surged over 20% in the first quarter of this year. Industrial goods and the service sector are also up substantially, gaining as much as 9% as the quarter comes to a close today. 

The market sentiment across Europe on Wednesday paints a rather negative picture with the UK, Germany and France, all trading in the red. UK’s FTSE100 is down by about 0.30%, while Germany’s DAX and France’s CAC40 are lower by 0.05% and 0.15%, respectively. 

The search for direction across the markets today follows remarks made by ECB President Christine Lagarde on the euro-zone economic outlook and the pandemic-stricken Europe hit by vaccine shortfalls around the continent. European Central Bank President Christine Lagarde appeared for a scheduled interview with Bloomberg TV during the early hours of the European session. In the interview, Ms Lagarde said the ECB will not be guided by the short-term economic headwinds, rather the central bank will adjust its Pandemic emergency purchase programme (PEPP) to respond adequately to market conditions. 

“In that general macroeconomic situation that is marked by uncertainty, what monetary policy has to do and what the ECB has to do, is to provide as much certainty as possible. And this is really the aim of the most recent monetary policy decision we have taken,” Ms Lagarde commented. “I think that in the very exceptional circumstances that we are encountering, providing a degree of certainty is the best that we can do at the moment,” she said.

Bond Yields Aiming Higher

The ECB President vowed to use all tools at their disposal to keep the economy afloat even if investors push bond yields higher. “They can test us as much as they want,” Ms Lagarde said. “We have exceptional tools to use at the moment. We will use them as needed.”

Christine Lagarde also commented on the current lockdowns and the vaccine shortage in the old continent by saying that the renewed lockdowns and the vaccination rollout are “short of what the ECB had expected”. The ECB President warned that in the short term, the outlook remains “downward”, but she expects the situation to improve in the medium term. “Medium-term for us is a couple of years,” she said, also mentioning that the time horizon “actually fits with the hope for recovery, in other words, the return to pre-Covid 19 situation which we estimate at, probably, mid-2022.”

In order to preserve “favourable financing conditions”, the ECB pledged to “significantly increase” the pace of its bond-buying programme to curb rising borrowing costs.

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