Market Update - ECB delivers rate cut and says is “well positioned” to navigate uncertainty ahead

Highlights: The European Central Bank (ECB) delivered the widely anticipated eighth 25bps rate cut in this cycle, taking the deposit rate to 2.0 per cent. While policymakers now see weaker inflation this year, and below-target inflation the following year, the council avoided to commit to further rate cuts. President Lagarde said the ECB is “well positioned” to navigate uncertainty keeping a data-dependent approach and that the cutting cycle has “just nearly concluded.” Markets received that as a hawkish signal, as they were priced for more rate cuts. We retain our view that this was the last cut in the cycle – assuming no external shocks. We have a neutral view on Eurozone equities and on the euro, while we hold a preference for EUR IG quality bonds.

• Eurozone inflation is near 2 per cent, growth has been more resilient than expected so far this year, and unemployment is at all-time low levels. It should thus make no surprise that the ECB says is “in a good position.” However, amid the “exceptional uncertainty” from global trade tensions, policymakers restrain from celebrating with a victory lap. President Lagarde kept all options open by refusing to provide guidance even to the direction of travel, in contrast to earlier this year
• Our base case is that this was the last ECB policy rate cut in this cycle. Policymakers might leave rates on hold in July before re-assessing the situation in September, along with the next set of economic projections and with hope of more clarity on the global trade outlook. As ECB Chief Economist Lane has highlighted, policy rates are now near “clearly accommodative” levels, and as risks to the outlook remain in place, policymakers might find it prudent to keep some powder dry to face any shock in demand, if trade relations deteriorate
• As we see investor confidence towards the US recovering, we expect diversification flows into Europe to slow and see stronger potential for US equities to outperform, and hold a neutral view on EUR. That being said, we see domestic tailwinds in European markets benefitting sectors such as industrials, financials and healthcare, and thus hold a neutral view on Eurozone equities