Draghi Misunderstood By Investors

Wednesday, 28 June:. Investors seem to have well and truly misunderstood Mario Draghi this week as the ECB’s president yesterday said the bank’s current stimulus needs to stay in place, although confident it is working, inflation dynamics remain and so the full effects (of the stimulus) will gradually materialize. The euro area has seen improved inflation figures, a return of economic growth and any political instability has all but disappeared, and as much as these have been recognised by Draghi, he argued that inflation dynamics aren’t solid enough to exit the bank’s stimulus programme. Investors read this as an indication of an imminent policy tightening, sending the euro and bonds in the region higher. However, these gains have all but been reversed as it seems Draghi’s  his intentions were to signal tolerance for a period of weaker inflation, not quite the hawkish momentum of yesterday.

Staying with central bankers, and the ECB’s forum on central banking in Portugal, Mark Carney, the Governor of the Bank of England, sent the pound higher against currencies after he said interest rates in the UK may have to rise, and it would be debated “in the coming months”. The comments come after the MPC decided to keep rates on hold earlier in the month, and a day after the bank’s financial stability report in which they tightened bank capital requirements. Carney continued by saying three factors will be looked at to inform his decision on raising rates: the extent to which weaker consumption growth is offset by other areas (such as business investment); wage growth and; the UK economy’s reaction to Brexit. The MPC next meets on August 3rd, a year after they reduced interest rates to 0.25% following the EU referendum result. At the last meeting the vote was 5-3 for a rate hold. The pound jumped against the euro and US dollar as Carney’s comments were revealed, and at the time of writing GBP/EUR is +0.67% at €1.1378, while GBP/USD is +0.90% @ $1.2928.

On Monday, the Co-op Bank said it was no longer for sale, while today the bank announces it has secured a £700m rescue package. The bank has agreed to separate its pension fund from the Co-op Group’s scheme, while investors have agree to swap their debt for a stake in the bank. Meanwhile, Tesco have announced 1,200 jobs are set to be cut at its head office as part of a major cost-cutting drive in a turnaround plan that aims to reduce costs by £1.5bn. The cuts come a week after the Supermarket retailer said it will be closing a call centre in Cardiff, with 1,200 jobs set to be lost. Elsewhere in the UK, Dixons Carphone have reported record full year profits, despite a challenging mobile market, although demand for electrical products, more so computers and white goods pushed like for like sales in the UK higher by 4%.

Leave a Reply