Shares Benefit as Central Banks Keep Investors Hooked

It appears that uncertainty has not hurt European shares.  The DAX and the CAC seemed to have stabilize with the hope that down the road, the ECB will provide the necessary monetary stimulus to drive equity prices higher. In the meantime, while the ECB plays wait and see, stock will consolidate ahead of a run up into the September ECB meeting.

Share index

The ECB kept interest rates unchanged which was expected. The ECB didn’t spring any major surprises on the markets on Thursday, with Draghi effectively confirming the central bank’s wait and see stance at least for now. Uncertainty has increased generating volatile and affecting the financial markets much more than the real sector. It also appears that the ECB wants to have more time to assess the real impact of the Brexit vote. An overreaction now may lay the ground for difficult corrections now, but at the same time Draghi left the door to a policy review in September wide open and was eager to stress that the central bank is not just willing, but also able to act again if necessary.

Draghi repeated Thursday that the risks to the growth outlook remain tilted to the downside, even if the central scenario of a moderate recovery remains intact. What complicates the picture though, is the fact that there is increasing divergence between market based assessments of the situation and the view at company, or economist level. Draghi highlighted that today with reference to the latest survey of professional forecasters, which apparently shows little change in long term inflation expectations, contrary to market based indicators which seem to point to a significantly lower inflation trajectory.

The first post-Brexit surveys for the Eurozone show a similar divergence, with the German ZEW, which focuses on investors, falling into negative territory, indicating that the number of pessimists now outnumbers optimists. At the same time, however, today’s French national business survey showed an unexpected rise in confidence with the reading for the production outlook also picking up, despite the Brexit vote. It will be interesting to see what tomorrow’s preliminary PMI numbers for the Eurozone, as well as for the U.K. show, but so far at least, the data from the real sector still backs Draghi’s assertion that a modest recovery remains the central scenario.

Shares across the globe have benefited from easy monetary policy and central banks have done a good job of keeping investors hooked with the promise of future action down the road.  If the Brexit becomes a non-event, and growth remains stable, central banks will have avoided making a quick decision to act, and retain the flexibility they need if economic data begins to move south.

About the Author