Global Markets

Donald trumps the ECB

Donald trumps the ECB

The UK election result is what everyone is focused on today. However, outside of the UK’s political bubble, other momentous events have the potential to reshape our world. Yesterday we got a taste of this with two very different and highly significant pieces of news.

First, in Europe Christine Lagarde presented her first policy outline as President of the European Central Bank (ECB).  As a former lawyer and International Monetary Fund (IMF) chief she has a different background to all her predecessors in that she is not an economist. It is thought hailing from a different background she will bring significant changes to how the Central bank is governed.

At this stage no one expects much deviation from the ECB’s primary objectives – maintaining price stability and implementing monetary policy for the Eurozone. However, Ms Lagarde has been making it known she wants to add an additional competence to the ECB’s mandate, and use monetary policy to help tackle climate change. Supporters of her ‘big idea’ argue that the extreme weather events associated with global warming will also lead to supply shocks and higher inflation.

What did she reveal at the conference yesterday?

  • Her assessment of the economic outlook for Europe was relatively optimistic.
  • The so called ‘Japanification’ of Europe was roundly dismissed by her. She believes Europe will not find itself in a similar situation to Japan i.e. battling deflation for decades and tussling with low growth.
  • She suggested normal monetary conditions will return at some point. This is meaningful because as of 2019 the ECB has added over 2.6trn Euros to its balance sheet and is buying bonds at the rate of 20 billion euros per month as it attempts to foster better economic growth. The is demonstrated in the following chart.

Graph: Total Value of the European Central Bank’s Balance Sheet in Trillions of Euros

Source: Bloomberg, data as of December 2019

  • In a lighter moment Ms Lagarde suggested she is neither a dove nor a hawk, but an owl; presumably meaning a wise one.
  • This change in the use of language, and a new description of herself, may seem to be a bit of nonsense, but when central bankers speak, the language they use matters. In this instance she is obviously keen to avoid being associated either with those calling for a relaxation of monetary policy or those advocating a harder line in the monetary policy debate. Instead, setting herself apart as an independent arbiter between the two factions.
  • This tactic coincides with her big strategic review, underway now, and current monetary policy set at ‘highly accommodative for a prolonged period’.
  • Ms Lagarde is entering choppier political waters by stepping into the discussion on fiscal policy. She again called on governments in Europe to loosen fiscal policy to stimulate growth, saying policymakers should join the ‘economic ballet’.
  • In terms of her focus on climate emergency and inequality it seems we will have to wait to see what comes out of her strategic review early in the New Year.
  • Ms Lagarde announced she ‘will be different and will be myself’. What this means exactly is still to be determined. Will this difference be stylised, or will it be substantive? This will be determined and judged as she reveals more about her policies in the months and years ahead.

The second big item of note yesterday was another of Mr Trump’s famous tweets. Whether by design, or purely by coincidence, he issued a tweet after Ms Lagarde had spoken, essentially upstaging her.

Source: Twitter, December 2019

The structured and prepared remarks from a very polished Ms Lagarde contrast starkly with Mr Trump’s somewhat brusque approach. We have of course become used to his bombastic tweets, promising something wild which then falls flat.

The deal to which he refers is, however, vitally important and market participants are hanging onto every word he utters, and he knows it. Although China and the US are in a race for supremacy, probably for many years to come, progress towards a trade agreement now matters a great deal. The indications are that the US is looking to reduce tariffs on $360bn of Chinese goods by 50% and to defer new tariffs due to be implemented on December 15th. This is good news for the global economy, but we have been at this juncture on two previous occasions only to be disappointed. At face value the jump in stock markets around the globe yesterday suggests the news is being taken seriously.

In conclusion, yesterday’s events are highly significant: The ECB is positioning to back fiscal loosening, we have a possible resolution to damaging trade tariffs and today marks the start of getting Brexit done.

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