If the ECB’s ultra-looseness is an attempt to quell a flare-up of ever-present political risk, the strategy is becoming counterproductive.
In addition to irking President Trump, the ECB’s extreme policy is riling Germany’s Finance Minister Wolfgang Schäuble, who has blamed Mario Draghi for “50 per cent” of the success of the populist right-wing Alternativ Für Deutschland. And by frustrating voters worried about the low interest rates on their hard-earned savings, the ECB is also playing right into the hands of Marine Le Pen’s Front Nationale.
The ECB acknowledges that “the risks surrounding the euro area growth outlook relate predominantly to global factors” rather than domestic factors. If the ECB is right, the extent of anticipated monetary tightening outside the euro area is overdone. If the ECB is wrong, then the extent of anticipated monetary tightening inside the euro area is underdone. Either way, the investment conclusion is the same. Our European strategists recommend an underweight position in German Bunds relative to U.S. Treasuries. Near-term risks to the euro are to the upside, especially versus sterling.