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GOLD SLIDES Following ECB Let Down




Gold and European equities took a beating In wake of the ECB’s latest rate decision and press conference. 


Prior to the rate decision, gold was trading at roughly $1720, before slumping some $20 to around the $1700 mark. European equities also slumped; on the day, the DAX is down some 1.7%, Euro Stoxx 50 1.7% and FTSE 100 -2.7%.


EUR was also hit initially; EURUSD was at roughly 1.0880, but by the time Lagarde had wrapped up the press conference, EURUSD had slipped to below 1.0840 (EUR has since reversed amid month end rebalancing FX flows). 


In terms of the meeting itself, few surprises were delivered and the disappointment was more about the lack of action. 


As expected, the ECB opted to keep rates on hold at -0.5% and said that rates would stay at these levels until inflation nears its goal. 


The bank’s pre-Covid-19 Asset Purchase Programme (APP) was maintained at EUR 20bln per month, and the bank’s EUR 750blb Covid-19 crisis QE programme (PEPP) was also maintained. However, the bank said it was ready to increase the PEPP in size if needed (a big hint that it may do so in June). 


The major policy change was the new PELTROs (Pandemic Emergency Longer-Term Refinancing Operations) programme. Basically, incentives have been drastically increased for banks to lend more money, and the ECB is providing more credit for banks to do so. 





In the press conference, ECB President Lagarde was asked about the potential inclusion of junk bonds as part of the APP; she said the board of governors had not discussed it yet, but did not rule it out. She did however say that the “best tool we have” is PEPP - another big hint that an expansion of the programme might be incoming. 


Many in the market had been hoping for the ECB to announce an expansion of PEPP today. They were disappointed (likely hence the deflated market reaction). 


However, as we noted to the members prior to the event, there was always a strong chance that the ECB would err on the side of caution and avoid going all guns blazing so soon, for fear of taking the pressure off of the fiscal authorities. 


The EU27 is yet to agree on its major Covid-19 fiscal response (the so-called EU Recovery Fund); we are expecting the European Commission’s proposals on the EU Recovery Fund within two weeks, while the German constitutional court will soon be ruling on the ECB’s Asset Purchase Programme (on 5 May). 


By holding off, the pressure on the EU to act fiscally has not been lessened. 


That said, markets certainly haven't seen things this way (they like things now!).


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