ECB turns on the taps, but will it be enough?

Mario Draghi has brought out the kitchen sink once again, with the eurozone economy no better despite all his efforts. The question is whether the recovery will stick this time around. Meanwhile, the outlook for US-China relations appears to have improved as both sides pull back once more.

• Euro losses reverse as ECB decision is largely priced in
• ECB opens the taps, with Lagarde likely to focus on fiscal responsibilities
• US-China tone improves, as traders hope to see the back of the trade war

Volatility was always likely to be the name of the game today, and so volatility seems to have ultimately taken precedence over direction across both FX and stock markets in the wake of a new package of easing measures from the ECB today. It seems to be a case of sell the rumour and buy the fact for the euro, with the euro looking set for the biggest gain in a week despite today’s news. It took less than an hour for Donald Trump to tweet his displeasure at Draghi’s latest bout of easing, yet a mix of improved US-China tones coupled with a EURUSD rise do little to put pressure on Powell. Mario Draghi’s decision to implement a second QE programme (€20 billion per month) smacks of desperation  as the Governor looks set to close out his tenure with Germany on the cusp of a recession. With rate in negative territory and QE2 coming into play, the ECB is clearly at the limits of its ability, with both Draghi and Lagarde clearly indicating that the onus must be on targeted fiscal expansion.

Hopes of a US-China resolution have been boosted as both tone and actions improve ahead of talks between the two-sides. The Chinese decision to cancels a raft of tariffs on US goods have been greeted by a delay in those tariffs the US was expected to impose on 1 October. Ultimately, we are moving towards an election year, and while Trump will continue to blame the Fed for any economic weakness, the true fault lies with the Trump-led breakdown in trade that has helped dent growth globally. The trade war remains the key market risk for traders, and thus while many have grown tired of going around in circles, any eventual resolution could bring a huge spark for financial markets.