Stocks Fall As ECB Cuts Growth Guidance, Bank Stimulus Plan Falls Flat

Global markets sank Thursday after the European Central Bank cut its 2019 economic growth forecast and announced a new round of longer-term refinancing operations (TLTRO) stimulus for European banks.

The ECB cut its 2019 Eurozone growth forecast from 1.7 percent to 1.1 percent. It also announced a third round of bank stimulus that will begin in September and run through March 2021. The ECB indicated it has no plans to raise interest rates from record lows in 2019.

Why It’s Important

Economists anticipated there would be no rate hike from the ECB. Some suspected a TLTRO announcement, but few anticipated such an aggressive cut to 2019 economic growth forecasts.

The dovish announcement of no rate hikes and additional bank stimulus was likely already priced into markets, according to Tom Essaye, founder of Sevens Research Report.

“For the first time in well over a year the ECB matters again for US stocks as investors need continual positive affirmation that global central banks are turning dovish. If they don’t get it from the ECB, that will add to the headwinds facing markets,” Essaye said Thursday.

Berenberg analyst Philipp Jaeger said much of the negative market reaction may be due to the degree of the stimulus falling short of what some investors had hoped.

Draghi Speaks

Markets around the world headed lower after ECB President Mario Draghi spoke to reporters on Thursday about the ECB’s economic outlook.

“The persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets appears to be leaving marks on economic sentiment,” Draghi said.

The biggest factor creating chaos for the EU in the near-term is Brexit. The U.K. will hold a series of votes next week to determine whether it will adopt Prime Minister Theresa May’s Brexit proposal that was initially rejected in January, exit the EU with no plan in place or postpone Brexit until a later date.

In addition, the international trade war spearheaded by U.S. president Donald Trump has created additional uncertainty in the European economy. Despite aggressive international tariffs from Trump, U.S. trade deficit surged to its highest level in a decade in 2018.

What’s Next

The next major economic data point U.S. investors will be watching is Friday’s U.S. jobs report. Essaye said investors will be looking for job creation in a sweet spot range of between 125,000 and 350,000.

The SPDR S&P 500 ETF Trust SPY dropped 0.9 percent on Friday and is down 2 percent on the week.

Here’s a look at how other stocks and ETFs were impacted Thursday:

• iShares MSCI United Kingdom Index EWU was down 0.7 percent.
• Vanguard FTSE Europe ETF VGK was down 1 percent.
• Deutsche Bank AG DB was down 5 percent.
• ISHARES TR/MSCI EUROPE FINL SE EUFN was down 2.2 percent.

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Mario Draghi is captured during the special address session at the Annual Meeting 2013 of the World Economic Forum in Davos, Switzerland.