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European Central Bank sounds the alarm

President Mario Draghi send a "very negative" message.

Jack Derwin

Digital Journalist, Your Money

Global equity markets tumbled on Thursday as the European Central Bank (ECB) announced it was holding interest rates amid concerns of slowing growth.

While relaxing monetary policy typically sees equity markets soar, the announcement made by ECB president Mario Draghi signalled that all is not well in the European economy.

“We now expect [interest rates] to remain at their present levels at least until the end of 2019, and in any case for as long as necessary,” Draghi said.

In ruling out any rate hikes for the next nine months, the message was clear: there’s no expectation that European growth will tick up.

“The outlook for real GDP growth has been revised down substantially in 2019 and likely in 2020,” Draghi added.

In slashing its expectation of growth this year from 1.7 per cent to 1.1 per cent, the ECB said it would offer cheap loans to European banks to stimulate the sluggish economy.

Those loans mean that the banks will be able to borrow and lend more money from September this year, effectively stimulating the economy with more cash.

It comes as simmering debt concerns in Italy, Brexit uncertainty and the ongoing US-China trade war continue to weigh heavily both in Europe and abroad.

“Obviously the message from the ECB president here is very very negative,” Daily FX senior strategist Ilya Spivak told Trading Day. 

Global equity markets responded poorly, with the Euro plunging.

“The implications for global growth were very significant and we saw that in the market reaction. Right as the Euro fell, so did the S&P futures, the Yen rallied, we saw a downshift in [bond] yields, we saw a downshift in the [US] Fed forecast, which is typically indicative of risk aversion,” he explained.

“It looks like what this fed into was yet another level of confirmation that there is a downturn in the global business cycle and the financial markets reacted in a very classic risk-off fashion.”

That translated to a poor session on Wall Street, a continuation of a four-day rout and its longest since December’s selloff.

The Nasdaq lost 1.13 per cent, the Dow Jones closed down 0.78 per cent and the S&P 500 finished 0.81 per cent lower.

Meanwhile, the ASX fell 0.32 per cent on opening.

Watch all of Ilya Spivak’s comments above. 

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