On Thursday of last week Mario Draghi announced, unsurprisingly, the end of the European Central Bank’s (ECB) bond buying program. The ECB supported the European markets and economy over the last four years by buying euro 2.6 trillion of sovereign and corporate debt. This was a large and important program, and announcement of its ending is a major milestone in removing crisis era stimulus. With the removal of this stimulus, the monetary screws are slowly tightening.
The ECB will not sell any of the debt it purchased, will reinvest all proceeds, and perhaps most importantly will keep the main interest rate at zero at least through the summer of 2019 or until inflation meets the target of slightly below 2%.
We could be waiting some time for the ECB’s first interest rate hike. The ECB’s target of 2% inflation looks to be a long-term aspirational goal considering recent slower growth forecasts and the increasing risks to its economy. Just 24 hours after the ECB announced the end of its bond buying program, both the Eurozone and China reported weaker economic data. In sympathy, U.S. stocks sold off and bond prices rallied. Stocks down and bonds up is the normal reaction to bad news, as we discussed last week.
So, what does this mean for portfolios?
It reinforces our belief that it is good to be cautious! When both the Federal Reserve and the ECB are in the process of slowly tightening the monetary screws, and just as global growth looks to be slowing, the result will be more volatility, with the possibility of even slower economic growth.
Sources: ECB, Financial Times, Bloomberg