Draghi starts a rush for the exits

The ECB once said it would 'do whatever it takes' to buoy the eurozone. So why is its president spreading gloom?

The market's rollercoaster ride is at full throttle, but what exactly is to blame for the sudden rush for the exit? There are indeed a number of options to choose from, but Mario Draghi must certainly count himself among the guilty after his performance overnight.

In a speech to the Brookings Institution on the eurozone’s progress, the usually upbeat President warned that “without reform in the region, there can be no recovery”.

While Draghi has previously been quite vocal on the need for reform, he's also tended to take a much more optimistic view on the region's outlook than he did last night. 

“I am uncertain there will be very good times ahead if we do not reform now,” he said.

So, little over two years after he put a lid on market volatility by proclaiming the ECB was ready to ‘do whatever it takes’, Draghi seems to have temporarily forgotten the unwritten central bankers rule: Don’t say anything that will rattle the markets!

His comments couldn’t have come at a worse time. Germany, previously viewed as the lone pillar of strength in the region, is headed for a recession, while the US is preparing to finally put an end to its money-printing spree and will soon raise rates.

Aside from pushing for long-term reforms, Draghi desperately needs to convince German finance minister Wolfgang Schauble to agree to more stimulus measures to save the eurozone. But speaking in Washington overnight, Schauble was unrelenting, saying that “writing cheques” was no way for the region to lift growth.

Still, Draghi couldn't resist a thinly-veiled dig at Germany, making reference to his desire that certain eurozone economies should be spending more to boost growth.

“For governments that have fiscal space, then of course it makes sense to use it. You decide to which country this sentence applies,” he said in the Q&A session.

What markets really needed from Draghi was a sense of confidence, especially following the news that German exports slumped 5.8 per cent in August, the biggest decline since January 2009. Instead, What he gave the impression that he might not actually have the capacity to save the eurozone. 

The pessimism was hard to ignore, and markets ran with it.

For local investors, the increased tensions cap a six-week period of volatility that has seen our market lose 8 per cent to date. Indeed, thanks to the slumping iron ore price and the sliding dollar the local market has significantly underperformed its peers since the start of September, with our decline far exceeding the 4 per cent on Wall Street and the 5 per cent fall of global shares.

Keeping in mind that September and October are typically weak and volatile months in the sharemarket, AMP chief economist Shane Oliver believes the global correction could have further to run.

“The issue is that the US market has gone for two years without a correction. We last saw one in 2012, but since then, up until a month ago, volatility had completely fallen away.”

That’s certainly changed now, with the CBOE Vix Index (VIX) shooting up 25 per cent overnight, to 18.8. Nonetheless, it remains below its long-term average of 20.

But geopolitical tensions, such as conflict in the Middle East and Ukraine, as well as the prospect of an Ebola pandemic, certainly aren’t helping sentiment.

Still, Oliver doesn’t expect the correction to continue for more than a few weeks.

“I think sometime in the next month both globally and locally we’ll see the low and then we’ll have a rally in the run-up to year-end and that’ll continue next year.

“Corrections can often run 10-15 per cent and it’s quite conceivable that the market could fall further, but I think the key is that it’s probably just a correction and not a new bear market.”

Now we just need the ECB to take the QE baton from the Fed – and hope it doesn’t stumble.

Related Articles