- Starting with Europe, hopes for European growth were stymied as sanctions against and by Russia reduced trade. The question is however if Russia is to blame or if the European recovery wasn’t stalling anyway, which is what we believe. An escalation of sanctions (as a direct result of rising tensions) in the Ukraine could lower global growth in 2015 by around 0.5% according to the Rabobank. It could also lead to a higher oil price lopping another 0.2% off global growth but impacting Europe more severely. Obviously markets could be rocked more by a deterioration in sentiment.
- The ECB attempted to stimulate growth by lowering short rates (from 0.15% to 0.05%) and lowering the deposit rate from -10 bps to -20 bps, additionally they suggested they may also start buying ABS and covered bonds to keep long rates low. This had an initial positive effect but it wore out quickly. Draghi however did manage to weaken the Euro versus the USD making exporting somewhat easier for Europe. It could of course be that Draghi is signalling that there should be a decoupling of US and European long rates (as rates should be rising in the US) and that if the markets don’t see this he will help make it so.
- While ECB actions get a lot of air time we actually don’t believe interest rates are the problem. We don’t believe there will be more investment if long rates go down further as the ECB suggests. We do think that negative rates on deposits with the ECB will help banks lend more. What is necessary are political measures to deregulate markets and stimulate households to get their finances in order. In the end governments should provide the basic services and stop there allowing for lower taxes so that real incomes rise, increasing consumer confidence. That said we believe a meaningful tightening in Europe is a long way off. …
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