The events of Wednesday were a study in sentiment-driven overreaction. Indeed, that the ECB president didn’t have to cut rates as much as people were expecting could be read as a good thing for the European economy, but perhaps more worrying is the possibility that markets are beginning to doubt even the narrative that fighting central bankers is futile.
As AXA IM’s Chris Iggo put it on Thursday: “On the bigger picture, the more worrying thought is that Draghi has come to the view that the marginal product of monetary policy has severely diminished. QE has not delivered inflation. Maybe, on its own, it is not enough. Maybe growth in jobs and real incomes needs a fiscal boost. Maybe central banks should finance a fiscal boost.
“If expectations of the impact of monetary policy are now prone to disappointment, the concerns will be about the lack of growth, debt sustainability and the lack of any improvement in balance sheets…Unless growth does continue to improve, the worst thing for equities and credit would be for investors to take the view that policy makers have thrown the towel in.”
Which brings us back to the next few weeks and the forthcoming FOMC meeting – a meeting at which many now believe the Fed will finally raise interest rates. Investors would do well to properly consider how much money rests on the back of just a few recent, or imminent, decisions. And, if we can take anything from this week it is that markets right now do not suffer disappointment particularly well and it is unlikely that they will take being kept in the dark for much longer lying down.