ECB stands firm as BOC takes the plunge

This month’s ECB meeting was always likely to be a damp squib due to its timing. The Eurozone has just started to see its vaccine roll out ramp up, and although lockdowns are ongoing in many parts of the currency bloc, it is likely that over the next month or two these will be eased. This means that the next ECB meeting in June, is likely to give us a more accurate version of where the ECB will go next. For now, the ECB remains firm to its dovish mantra, with ECB President Christine Lagarde saying that tapering asset purchases, which are currently running at EUR 19bn a week, was not discussed. In the ECB’s statement after its decision, the ECB said that it had “decided to reconfirm its very accommodative monetary stance”. The fact that Mme Lagarde mentioned the light at the end of the very dark Covid tunnel meant that financial markets have taken today’s message with a pinch of salt, EUR/USD is down a touch, but remains above $1.20, while Italian 10-year bond yields are down slightly at 1.75%, however, they remain at elevated levels compared to 3-months ago.

Why are central banks so dovish? 

Although the world’s largest central banks remain committed to asset purchases and their dovish stances, there was, until earlier this week, a general view that the uber policy support given by central banks to society during these unprecedented times was coming to an end. However, earlier this week, the stock market rally stalled as financial markets digested the news that infection rates and new variants continue to surge, with India recording its largest ever daily death toll and a record number of new cases. Media headlines about new variants and the inadequacy of current vaccines to irradicate them abounded, likewise, financial TV rolled out interviews with scientists and epidemiologists leading to renewed fears that this pandemic is not behind us, even in societies where vaccination rollouts have been quick and efficient.

BOC buck the trend 

The Bank of Canada on Wednesday decided to take the plunge and start the long tapering process. The BOC was the first of the developed world central banks to signal that its exit from stimulus is nearby. Rate rises are expected in 2022, the Canadian economy is in a strong position for growth to bounce back this year partly due to the recovery in commodity prices. The BOC also predicted that other major central banks would follow suit.  The bank also said that it would shrink its asset purchases by a third. This was a ballsy move by the BOC, but it is a taster of what larger central banks’ paths out of Covid stimulus will look like. USD/CAD continues its long decline, and although technical indicators suggest that this index is oversold, we can’t see much scope for a recovery anytime soon, although further downside may also be capped at $1.24 in the coming days, as this pair has already had a large move lower in the last 12 months. 

Stock markets on pause 

This seems like an opportune moment for investors to pause, and to reassess how far stock markets have recovered since the news about the first vaccines broke in November last year. Hence, we have seen stock markets drift on Thursday and a further easing in the 10-year Treasury yield. The market is connected at the moment, so malaise in us bond yields is a sign of concern about new covid variants, which is keeping stock market traders on their guard, instead of unleashing a new wave of optimism. The FTSE 100 has only just recovered its poise after 2020’s middling performance, however, it managed to eke out a gain on Thursday along with other European indices, although it remains below the key 7,000 level. We believe that the FTSE 100, which is one of the developed world’s most sensitive indices to the effects of mass lockdowns, could be at risk if Covid fears strike again. Thus, was

atch out for news flow about rising infection and hospitalisation rates. Right now, the media is in hysteria mode, however, the data is still saying that vaccines are effective and hospitalisation rates due to covid are at extremely low levels. Thus, in financial market terms, this is time for caution, not panic. The fact that investors are not panicking is also evinced by the Vix index, which remains steady. 

An illustrious start to US earnings season 

While stocks pause at these levels, we would note that most corporates are in good condition. Of the 9% of S&P 500 companies that have reported results 81% have reported EPS above estimates and in aggregate US corporates are reporting earnings that are 30% above estimates for Q1. These are excellent results, suggesting that the US economy is the bellwether for the global economic recovery after this pandemic. It also suggests that Netflix was just a blip. However, we are early in the reporting season, and a lot of good news is already priced in. if the tech giants who report next week fail to live up to expectations then we could see a further retreat in global stocks. 

Overall, the falling Treasury yield is keeping a lid on the dollar, which is why EUR/USD can stay above $1.20 even when the ECB maintains its dovish tone. Added to this, European shares and the FTSE 100 are likely to continue to outperform their US counterparts as the market prices in their recoveries lagging the US but coming into view. The caveat being no new data on covid variants and vaccine effectiveness; if there is the hint of a third or fourth wave of Covid that can’t be stopped by our current vaccines then stock markets and global risk appetite is likely to nose-dive. Overall, tech earnings will be important for US indices next week and expect any company that misses analysts’ (low) estimates to suffer the consequences akin to Netflix. This is relevant for the likes of Door Dash and Zoom, we will also watch with interest what Amazon has to say about its sales, which could be impacted at the margin by shops reopening and lockdowns easing. However, we still expect the big tech giants – Facebook, Apple and Amazon - to post yet another quarter of good results, which could limit the downside for their stock prices even if the overall US indices suffer in the coming weeks.