The ECB Shakes Up Markets

4
Dec

What’s Going On Here?

By Scott Tindle of FINIMIZE

The big news on Wednesday (December 2, 2015) was that the European Central Bank (ECB) announced more measures aimed at boosting the economy, but the announcements fell short of what investors were expecting. European stocks sold off almost 3% and the Euro rose around 3% versus the US dollar (both of which are big moves).

What does this mean?

These measures are aimed at lowering interest rates on government bonds. One way that the ECB lowers interest rates is by buying government bonds. Investors were expecting it to say that it would buy more bonds every month to push interest rates even lower, but it kept the amount unchanged – and that’s what disappointed the market. It did make some supportive announcements, but those were dwarfed by this disappointment. Still, the net result should help stimulate economic activity.

The Eurozone’s economy is already starting to improve, partly due to the measures already enacted by the ECB. For example, the unemployment rate is nearing a 4-year low. It looks like the ECB decided that the economy doesn’t need as much support as investors thought it was going to get.

Why should I care?

The bigger picture: Low interest rates aren’t a permanent solution. Most economists say that Europe has to undergo structural reforms to foster sustainable economic growth, for example, by making its labor markets more flexible (to put it bluntly, economists say it needs to become easier to fire less productive workers). But those sorts of reforms are a lot more difficult to implement politically than simply relying on low interest rates to promote growth.

For markets: European stocks sold off sharply and the Euro rocketed higher. That’s because low interest rates are, generally, supportive of stocks but bad for the value of the economy’s currency. Since so many investors had expected the ECB to more aggressively try to boost the economy, the reversal in the markets was pretty dramatic.

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