Market Extra: 5 key takeaways from the ECB’s decision to wind down its massive bond-buying program

Mario Draghi is presumably pleased with the market reaction to the European Central Bank’s decision Thursday to go ahead and detail its plans to end its massive bond-buying program while also signaling that it isn’t about to start lifting interest rates as soon as the purchases stop.

Indeed, it was the ECB’s pledge to keep rates at present levels “at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path” that appeared to make all the difference.

See: ECB plans to end its massive bond-buying program in December

Here’s a look at the main takeaways from Thursday’s actions.

Dovish counterweight

Investors might have been caught somewhat by surprise by the ECB decision to announce a taper, though officials had made clear it would be up for discussion Thursday. Moreover, had the ECB not offered a plan, it would have merely heightened expectations for a rollout at its late July meeting.

But it was the decision to promise rates would be hold until summer that was a shocker. It implies that rates won’t move until September. That is nine months after the bond buys end. That was a blow to investors who had been penciling in a midyear move, wrote analysts at Barclays.

It’s a risky world

Draghi, in his news conference, said the ECB didn’t want to “underplay” rising risks.

His emphasis on potential problems, while also insisting that the underlying economy remains solid despite a soft patch that could bleed into the second quarter in some countries, might also have helped blunt the hawkish effect of the ECB’s taper plans.

The ECB lowered its forecast for 2018 eurozone gross domestic product growth to 2.1% from 2.4%, while boosting its forecast for inflation this year and in 2019 to 1.7%.

A potential trade war is a worry…

Draghi was straightforward on the dangers of an intensifying trade spat that he said sees the U.S. squared off against the rest of the world. As for the euro area, the tariffs announced so far aren’t expected to have a large effect on the economy, but he warned that ECB projections reflect only measures that have been implemented so far. A tit-for-tat escalation could pose a significant danger, he said.

…but Italy isn’t

Draghi, however, played down the spike in Italian bond yields surrounding the formation of a new Italian government earlier this month. The moves weren’t accompanied by meaningful signs of “contagion,” he said, meaning the selloff in Italian debt didn’t spark a similar size move in debt of other countries, unlike during the worst days of the euro crisis in 2011 and 2012. There was also no sign of “re-denomination” risk, in which investors flee a country they fear could leave the euro, re-denominating debts in their home currency.

For that matter, Draghi repeated that the euro is “irreversible,” essentially arguing that it would be absurd to even raise the question of an exit.

Market reaction

The euro EURUSD, -1.6793% which initially jumped in response to the somewhat unexpected tapering announcement, quickly took a hard turn south versus the dollar as investors digested the full message. Eurozone government bonds rallied, pushing yields down, and taking the likely exit of a huge source of demand in stride. A weaker euro lifted European stocks SXXP, +1.23% with U.S. SPX, +0.12% DJIA, -0.23%  appearing to take a cue from the global equity market rather than a stronger dollar.

All in all, the reaction shows Draghi was able to successfully deliver a watershed moment without sending the euro soaring or creating undue market turmoil.

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