Markets give Super Mario another chance

Equity market sentiment quickly rebounded following the disappointing outcome of Thursday’s ECB meeting. However, the question is how long the markets will wait for the central bank to act?

ECB President Mario Draghi will soon have to deliver on his promises if he wants to avoid being called something less flattering than his current Super Mario nickname. The central bank’s rhetoric is clear: It will do all it takes to alleviate the Euro-area sovereign debt crisis, and it still has both new and old tools in its tool box. But despite the bank’s fine promises, its tool box remains tightly sealed, and the markets are beginning to lose patience.

On Thursday afternoon last week when it became clear that the ECB would once again not deliver, the market responded immediately by sending stocks lower. But as early as on Friday, sentiment rose again and the equity markets closed the week in positive territory. The market response can only be taken to mean one thing: the markets are willing to give Super Mario another chance and they have not yet lost faith in the central bank chief’s ability and willingness to open the tool box and make use of whatever tools are required. So, the markets let the central bank have the benefit of the doubt once again – maybe for the last time.

It is hard to see what might otherwise boost the European economy if the ECB does not act soon. The trend in European economic indicators is by no means impressive, and corporate results during the last reporting season did not fuel optimism either. On the other side of the Atlantic, prospects still seem better. But corporate results and indicators here have not been high and stable enough to bring calm to the markets. Corporate earnings growth has slowed down, and the past weeks’ indicators have reflected a negative trend.

Consequently, Friday’s jobs report was eagerly awaited. Fortunately, the long-awaited jobs report surprised on the upside, and as both the service sector and the property market show tentative signs of improvement, it is still much easier for investors focusing on the land of opportunity to stay optimistic than it is for investors focusing on debt-ridden Europe. However, no matter how you look at things, new monetary policy action must soon be taken, if the markets are not to lose faith completely.

The markets have been patient. Actually, they have shown more patience than could be expected, but now it is wearing thin. So the message to Mr Draghi and his colleagues at the ECB is clear: show us the money – today rather than tomorrow.

Henrik Drusebjerg
Senior Strategist