A European look

The European Central Bank (“ECB”), one of the most powerful central banks on earth, meets on Thursday 22 April.

A few related points on monetary policy (including ornithology!) and the stock market.

The outlook is almost the same since the ECB’s last policy meeting in March.
The ECB will probably simply confirm the decisions taken in March. June 2021 should be the more interesting meeting, when the ECB may decide to reverse the higher pace of bond purchases.

Pluses

Since the March meeting, the business activity PMIs have risen, retail sales grew more than expected in February etc.
There is optimism about the EU’s vaccination program, which is expected to pick up pace significantly in Q2 following a bungled start.
Around 400 million vaccine doses are now expected to be made available in the EU in Q2 after less than 80 million were administered in Q1.

Minuses

New virus cases have risen in the EU during this third wave of infection. Many countries have either extended lockdown measures or reimposed tougher restrictions.
It is expected that most of Europe won’t be able to significantly unwind lockdown measures until a few months down the road. This will delay the economic recovery.

Due to the pandemic, the ECB started buying EU bonds to kickstart lending and fuel economic recovery. It left that program unchanged at its meeting in March, with the target purchase amount still at 1.85 trillion euros ($2.21 trillion) — which is due to last until March 2022.
But it decided to increase the purchases on a monthly basis to alleviate some of the upward pressure of sovereign debt yields in the region.
Bond purchases were 74 billion euros in March. This was significantly higher than the 53 billion euro and 60 billion euro in February and January.

There seems to be a debate going on at the ECB.

Hawks

They believe that the economy will pick up strongly in the second half of this year.
The improved outlook has prompted them to hint that the acceleration is temporary, suggest at a tapering and a non-extension to bond purchases beyond March 2022.
They see higher inflation and growth from the second half of 2021 onwards. They want the ECB to begin tapering from Q3 onwards and end purchases as foreseen in March 2022.
But it will be difficult to materially taper before the Fed which may start tapering in early 2022.

Doves

They feel that talk of tapering while at the same time telling the market that a jump in yields is undesirable as it sends mixed messages about the ECB’s policy path. Not exactly a good trait of any central bank!
Some dovish members have added caution to the idea of an early withdrawal of stimulus.

Once again it appears that La Lagarde will have a tough job on 22 April to portray a unified central bank.
A full assessment of the pace of asset purchases won’t happen until June, but the tone of the press conference on 22 April may offer some idea of the ongoing and forthcoming debates.

Stocks bounced back on Wednesday 21 April after their worst sell-off this year. Optimism about a strong earnings season set off concerns about a rapid rise in COVID-19 cases in some countries. Tech stocks were the top gainers, up 1.3%.
EU equities may benefit from a sharp acceleration in EU GDP growth over the coming months due to the boost from reopening and the support from a strong U.S. recovery that is well ahead of the EU.
EU earnings are expected to rise a record 61% in Q1 2021, according to Refinitiv IBES data, placing Europe on course for a rare outperformance versus the US!
Another tailwind for EU stocks- rising bond yields. The European stock market has far fewer tech stocks compared to the US and far more of the “old economy” stocks such as financials and energy. For a change, this may prove to be a big advantage as these cyclical stocks do much better during a recovery and are far less affected by rising yields.
Then there is the standard argument that European stocks sell at attractive discounts compared to US equities. But they may be cheap for a reason.

It’s time for growth to return to the EU.

Also, for many years European stocks have promised much but largely failed to impress. Perhaps the pandemic will be a blessing in disguise!

( Image credit: open business council)