Comment on the ECB today’s decisions today.

We are in a summer lull and the Draghi fireworks will have to wait until autumn. By signalling their intention for rates to remain lower for longer as well as willingness to act when necessary, the ECB has bought some time to observe more data points and changes in economic conditions from the recent geopolitical developments and the efficacy of their outstanding policy actions and purchase programs.

It is essential for the ECB to continue to follow-through in their asset purchase program to maintain credibility and it is expected they will have to increase the amount of eligible assets along with extending the time frame of the purchase programs to fulfil its price stability mandate. The new Corporate Sector Purchase Program has created a supportive floor to European credit especially right after the UK referendum vote.

European bank equities have experienced the brunt of the pain this year and this is a concern for Draghi. The weakness in banks is driven by lower growth outlook, risks of higher non-performing loans and future write-downs, and earnings pressure because of a more flat yield curve. Since we expect the BOE, ECB and BOJ to do more reflationary actions in the autumn, certain higher yielding securities will continue to look attractive in this negative yielding world. We do, however, remain cautious on subordinated hybrid bank bonds. In the longer-term, policy actions alone will not solve the growth and debt conundrum; pro-growth fiscal and structural reforms are needed in conjunction with these unconventional monetary policies.

Regina Borromeo – portfolio manager – Brandywine Global