On March 10, 2016, European Central Bank’s (ECB) president Mario Draghi announced positive measures towards recovering the struggling Eurozone economy by decreasing the interest rates, increasing cheap loans to banks and expanding asset-buying programme. ECB is targeting to revive economic growth in the Eurozone with these measures, and given the above, the Europe and the global markets have made a smart recovery last week.

ECB decreased the main benchmark refinancing lending facility rate by 5 basis points to 0.25% while the deposit facility rate was decreased to -0.40%, which is a decrease by 10 basis points. Moreover, ECB even expanded the monthly purchases of its asset purchase program by €20 billion to €80 billion as compared to the previous €60 billion. This would continue for a year till March 2017, and has the possibility to be extended if required till the Governing Council decides that inflation adjustments are on track with their inflation rates forecasts and around 2% in the medium term. ECB would be enhancing the issuer and issue share limits for buying the securities via eligible international organizations as well as multilateral development banks to 50% as compared to 33% earlier. As per a new corporate sector purchase programme, European Central Bank is including investment-grade euro-denominated bonds for regular buying purposes which are delivered by the eligible non-bank corporations from the euro area. With this move, ECB intends to boost the asset purchases which would support to the real economy financing conditions. These purchases are forecasted to begin by the second quarter of this year. European Central Bank is also introducing a new series of four targeted longer-term refinancing operations (TLTRO II), from June of this year, with each having a maturity of four years.
 

EURO/US Dollar FX Spot Rate (Source: Thomson Reuters)
 
As a result of the ECB decision, the European markets recovered with DAX PERFORMANCE-INDEX (INDEXDB: DAX) and CAC 40 (INDEXEURO: PX1) improving by 3.76% and 0.13%, respectively (from March 11, 2016 to March 29, 2016). Euro Stoxx 50, FTSE MIB and IBEX 35 delivered an increase of about 3.4%, 4.28% and 3.7% respectively on March 11, 2016. Moreover, this favorable ECB move further added support to the recovering US markets, wherein the S&P 500 (INDEXSP: .INX) rose by 4.57% in the last four weeks. S&P/ASX 200 (INDEXASX: XJO) rose over 2.47% in the last one month (as of March 29, 2016). As per the Asian markets, the Nikkei 225 (INDEXNIKKEI: NI225) surged over 6.72% in the last one month (as of March 29, 2016) and India’s NIFTY 50 (NSE: NIFTY) index also rallied over 8.67% during the same period.
 

STOXX 600 Estimated EPS and revenue growth for 2016 (Source: Thomson Reuters)
 
Meanwhile, the commodity prices were also seen recovering in the last four weeks, while the International Energy Agency (IEA) commented that oil prices might have fallen to their lowest levels and estimates a better chance of the potential oil prices recovery due to declining output from Iraq and Nigeria as well as lower than estimated production restorations from Iran. This update further boosted the oil markets, with Brent oil posting some gains.

On an overall note, the Governing Council concluded that they estimate a stable or even low levels of major ECB interest rates till a stable outlook in the Euro area is achieved. This support from ECB could act as a major driver for the recovering global economy in the short term. Moreover according to the ECB macroeconomic projections for the euro area, the annual real GDP is estimated to rise by 1.4% during 2016 followed by an increase of 1.7% for 2017 and a surge of 1.8% for 2018. ECB’s annual HICP inflation estimates for the Euro area are about 0.1% for 2016, and 1.3% & 1.6% for 2017 and 2018 respectively.

The recent changes depicted an increase in European equities in early trading on March 29, 2016, with mining stocks tracking better metals prices. The STOXX Europe 600 Basic Resources index .SXPP also surged over 1% with jump in metals prices. At the backdrop, another point to note is that February month witnessed fastest growth for loans to households and businesses since 2011 in the Eurozone. Primarily, bank lending to non-financial businesses surged 0.9% in February from January’s 0.6%. Despite the above, many investors still want to be little cautious and believe that economic boost from monetary easing needs to be substantiated with some conclusive indications.

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