Stock markets rally on news of Christine Lagarde’s ECB job
Investors relieved that dovish monetary policy is not likely to be changed under new eurozone banking chief
London — European markets surged on Wednesday as investors bet that France’s Christine Lagarde would double-down on the European Central Bank’s dovish monetary easing stance as the bank’s next chief.
Government borrowing costs across the single-currency bloc tumbled to record lows and eurozone blue-chip stocks surged to their highest prices in more than a year after EU leaders agreed late on Tuesday to name Lagarde as the ECB’s new head.
A shrewd negotiator who has run the IMF but has little monetary policy experience, Lagarde would face the challenge of having to revive the eurozone economy with a nearly depleted policy arsenal.
For now, investors focused on two positive factors. One, that a monetary policy hawk such as Germany’s Jens Weidmann would not be taking over from Italy’s Mario Draghi at the ECB from November. Two, that Lagarde was not likely to alter the ECB’s current dovish policy stance, judging by recent comments.
“Crucially, Lagarde has always been supportive of the ECB’s unconventional policies, including QE (quantitative easing), which is essential for the credibility of future decisions,” said Pictet Wealth Management strategist Frederik Ducrozet.
“She could very well be the one implementing a QE2 programme in her first year as president.”
Like other major central banks, the ECB did a policy about turn this year, saying it stands ready to ease policy again if inflation remains weak.
Eurozone money markets expect a 10 basis point cut in the ECB’s deposit rate in September, and hope for another round of asset purchases is rising.
Most 10-year eurozone bond yields slid to record lows on Wednesday as investors bet the ECB’s dovish stance would continue under Lagarde.
Belgium’s 10-year bond yield turned negative for the first time. Benchmark German Bund yields fell to -0.399% – flirting with the ECB’s -0.40 deposit rate in a further sign of markets expecting further rate cuts.
The euro held steady at $1.1284 and eurozone stocks rose to their highest level in more than a year.
Andrew Kenningham, chief Europe economist at Capital Economics, which expects the ECB to cut rates in September and relaunch asset purchases before year-end, said the risk to that forecast was the possibility of a hawk succeeding Draghi.
“So it follows that the key thing about the appointment of Christine Lagarde as the next head of the ECB is that she is not Jens Weidmann,” he said.
In Italy, viewed as a key beneficiary of new ECB QE, 10-year bond yields slid 16 basis points to 1.68%. Two-year yields turned negative for the first time in more than a year .
In another positive development for Italy, the European Commission dropped its threat of disciplinary action against Rome on Wednesday after it acted to reduce its growing debt in line with the bloc’s fiscal rules.
But with more than half of the eurozone’s government bond market trading with negative yields, the impact of further easing steps is expected to be limited.
That creates a challenging environment for Lagarde, who will take over at a time when the global economy is grappling with a bitter trade war, the risk of a hard Brexit and weak inflation.
Lagarde’s immediate challenge at the ECB would be to overcome her shortcomings in monetary policy-making after other key ECB posts changed hands. Philip Lane has just taken over as ECB chief economist and Luis de Guindos became ECB vice-president last year.
Her communication skills will also be under scrutiny, especially coming after Draghi, highly regarded for his skilful communication with markets in set-piece speeches and post-meeting press conferences.
Lagarde, a former antitrust lawyer with Baker McKenzie, became French finance minister in 2007 and then took over at the IMF. A noneconomist leading a major central bank is unusual, although US Federal Reserve chairman Jay Powell is a lawyer.
“If confirmed, Lagarde would be the first ECB president ever without any experience in monetary policy,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
“Lagarde will probably face many challenges along the way. While the IMF chief is considered a qualified candidate, that won’t necessarily make Europe a more attractive place to invest over a tactical horizon,” he said.
For others, Lagarde’s political skills mean that as ECB chief she could hold greater sway in encouraging the bloc to support growth with more fiscal stimulus.
“The job of the ECB presidency is 50% economics and 50% politics, so given her background at the IMF and French finance ministry she is well versed with the personalities in Europe and the world,” said Peter Kinsella, head of FX strategy at UBP in London.
“The fundamental problem in Europe is that we will require greater co-ordination between fiscal and monetary policy and Lagarde will be able to do that.”