Draghi shoots his wad
By Arnaud Masset
Yesterday’s European Central Bank meeting launched TLTROs (cheap refinancing for banks), pushed back prospects of interest hikes and the revised growth projections down. All of this was expected, yet markets reacted violently. EUR fell across the board to $1.1177, more than -1% on the day. In equities, European and US indices bore the brunt of the sell-off. The reaction is surprising, knowing that all the announcements were expected. Maybe investors were in denial about low growth in Europe and across the globe.
The question now is: will central banks be able to manage a slowdown given the size of their balance sheets? We do not see how it is possible. Balance sheets are bloated, so it would very difficult for them to absorb an economic shock. Still, investors haven’t surrendered to panic – yet.
Brexit chaos, again
By Peter Rosenstreich
It’s coming down to the wire. UK Prime Minister Theresa May has hours to get a deal done. Talks on the Irish backstop collapsed, and May’s latest Withdrawal Agreement is facing another crushing defeat of up to 100 votes. Parliament might extend the Brexit deadline, which could prevent a no-deal exit for a few months, but also raise uncertainty.
May remains in the fight, with plans to visit Brussels Monday. That will leave hours for her to propose a deal for vote in Parliament on Tuesday. Brexiteers argue that two days are needed to analyse the next proposal, saying they won’t be rushed into a vote. As risk rises, GBP/USD continues to drop, and we expected further deprecation.