Updated April 8, 2016 7:45 a.m. ET
It is just a month since the European Central Bank announced a package of rate cuts, bank loans and expanded bond purchases that exceeded the market’s expectations. But the market isn’t dancing to the ECB’s tune.
One area that has shown durable improvement has been corporate bond markets. That makes sense, since the ECB’s plan to buy company debt was a large surprise.
But otherwise, the scorecard isn’t inspiring. The Stoxx Europe 600 is down 2.6% since ECB President Mario Draghi unveiled the new measures; European banks are down 10.2%. Southern European government bonds have underperformed: the gap between 10-year Spanish and German yields has risen to 1.47 percentage points from 1.33.
And the euro has continued to rise. It is up 3.6% against the dollar and 4.5% against the pound since the ECB’s March meeting; on a trade-weighted basis the move is smaller, but still the euro is 1.8% stronger on that measure too.
These developments won’t be welcome. The ECB’s account of its March meeting talks of the problem of tightening financial conditions generated by euro appreciation and falling equities. And while the ECB is clearly now focusing on the credit channel as a way to boost the economy, the euro remains a vital influence. The strengthening of the euro has come about in part because real interest rates elsewhere have fallen, in particular in the U.S., given the Federal Reserve’s dovish tone. In the eurozone, inflation expectations are still in the doldrums.
Perhaps the biggest sign of challenge to the ECB is that the talk among economists is already about whether “helicopter money”—effectively, direct cash injections into the economy—will be deployed in the eurozone. It may just be the latest fashionable topic of discussion, and looks highly unlikely for now. But it also shows the scale of the challenge the ECB has in getting ahead of the market.
Write to Richard Barley at [email protected]