Too early to say eurozone debt crisis over

The ECB further strengthened its commitment to keeping interest rates at very low levels, voting at its first policy-setting meeting of the year in Frankfurt to keep the main refinancing rate at 0.25%.

Rapidly falling sovereign bond yields in a number of crisis-hit European nations and better than expected economic data in recent weeks have prompted commentators to suggest the recovery is gathering pace.

 

However Draghi dismissed the “premature” comments of José Manuel Barroso, European Commission president, who the previous day had predicted the eurozone would pull out of the crisis this year. 

The ECB president adopted a dovish stance, saying that the European economy remained fragile, and hardening the central bank’s language on interest rates. The ECB “strongly emphasises that it will maintain an accommodative stance of monetary policy for as long as necessary”, he said. European stock markets declined following Draghi’s words.

Abi Oladimeji, head of investment strategy at Thomas Miller Investment, said Draghi’s comments are essentially a statement of the obvious.

 

“The economy does remain fragile. Output remains weak and with the latest data if anything the risk is to the downside. The fear of disinflation continues to take hold, and if you take those things together, his comment was spot on.” The market’s reaction to his comments is a reflection of how weak and uncertain the outlook remains, he added. “Monetary policy actions still carry a lot of weight.”

However looking at European markets from a valuation standpoint, things do not look as bad, said Oladimeji.

 

“The key will be the monetary policy outlook going forward and how the market responds to money-driven tightening. The eurozone has done pretty well on the back of expectations that the ECB will do what Draghi says – further monetary stimulus. They could cut rates further, or there could be another round of long-term refinancing operation (LTRO). They perhaps could go down the route of the Bank of England (BoE) and the Federal Reserve (Fed) with asset purchases, but that’s the most difficult given the political objection from Germany.”

Oladimeji said Thomas Miller remains neutral to positive on eurozone equities, with most focus on German companies as opposed to periphery nations.

 

“On the flip side, if there were asset purchases, the greater beneficiaries could be the periphery countries. However I don’t see outright quantitative easing (QE) unless there’s a clear threat of deflation.”