Market Commentaries

  • European Central Bank Draghi’s Speech Moves Markets


    Market Overview

    20140825 - Stock Market Update - Chart 1

    Sources: Rates Data and Economic Calendar—Bloomberg Markets as of 8/25/14; Equity Market Returns and Fixed Income and Alternatives Data—Wells Fargo Advisers as of 8/25/14


    Happening Now

    Draghi’s Speech Moves Markets

    European Central Bank President Mario Draghi spoke at the Federal Reserve’s Economic Symposium on Friday, August 22 and global equity markets have responded. Following his speech the Euro Stoxx Index has returned close to 2.5% this week (as represented by the ETF- FEZ) while the S&P500 has increased 70 basis points (as represented by the ETF- SPY). During his speech he acknowledged that high unemployment has a ripple effect across an economy and more needs to be done to quell the problem that has plagued the Eurozone in the aftermath of the 2008 financial crisis and the subsequent 2011 European sovereign debt issues.

    When Draghi came to power in November 2011 unemployment in the Eurozone was on its way back up and the world was watching the debt ridden P.I.I.G.S. to see if they would cause the monetary union to unravel. This of course did not happen (or has not happened yet) and the following summer Draghi gave his famous “Whatever it takes” speech suggesting that there were few limits to the monetary stimulus the ECB would be willing to provide. While no actual stimulus was provided, European equity markets responded favorably and credit spreads across the region tightened.

    Fiscal austerity, however, was and still is being applied. In the eyes of many economists, including Draghi, this has put undue pressure on the labor markets which in turn has caused persistently low inflation. Below is the chart Draghi presented (borrowed from Joe Weisenthal’s article on Business Insider) that shows the change in unemployment in the U.S. compared with that of the Eurozone:

    20140825 - Stock Market Update - Chart 2

    In his speech on Friday, Draghi acknowledged both the threat of falling inflation and weak labor markets and encouraged countries to revisit their fiscal policies while reminding the world that because of the Eurozone’s structure the ECB is limited in the tools it can provide.
    At Hennion & Walsh we are encouraged by both the acknowledgment of the Eurozone’s problems by the president of the ECB and by the markets overwhelmingly positive response. We still contend that growth opportunities, over the short to intermediate term, exist in European equities and suggest taking a diversified approach to investing in this asset class.


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