Draghi’s rein at ECB marks the start of new era

 
Louisa Bojesen
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YOU may have missed it if you were busy stressing over Greece and the European debt crisis. So let me just flesh it out. The month of October has been unbelievably bullish for stocks regardless of the mess that Europe still finds itself in and the recession worries everyone keeps talking about.

In the US, the S&P and Nasdaq are both up around 15 per cent on the month, the Dow is up over 12 per cent, and the small cap Russell 2000 is up 20 per cent.

October has also been strong for stocks in countries directly or indirectly involved in Europe’s woes. The German DAX is up over 16 per cent, the French CAC is up around 13 per cent, and the UK FTSE has put on some 12 per cent. Decoupling from reality, anyone?

Thursday marks the start of a new era, with the European Central Bank (ECB) set to announce its first rate decision under the command of new ECB President Mario Draghi. Draghi takes over the same week that Joerg Asmussen, Germany’s deputy finance minister, replaces ECB boardmember Jürgen Stark.

Not only will the current economic climate, and last week’s EU Summit decision to try and ward off a deeper Eurozone crisis, challenge the ECB members on policy, but the dynamics at the meeting may well be changed because of newcomers. At the last ECB rate decision, rates were left on hold. This week, many analysts are calling on the ECB to ease them due to continued recession fears. At a time where companies and countries are deleveraging, what we really need is growth. This would be one of the main reasons for the ECB to cut. Investec expects the ECB to cut rates by 0.25 per cent to 1.25 per cent. UBS is even more aggressive expecting the ECB to cut rates by 0.50 per cent to one per cent, and then leave rates on hold for the rest of the year. No doubt many of us will be tuning in to watch Draghi’s maiden performance at the ECB press conference after the actual announcement.

The risk of Greek contagion will remain a focal point this week too – especially after the Italian 10-year yield rose above six per cent at the end of last weeks’ disappointing Italian bond auction.

Thursday will also be a key supply day as an expected €8.5-10.5bn will come to the market from French and Spanish bond auctions. The French bond auction should be especially interesting given the recent volatility seen in French bonds. Will investors still want to buy? We shall soon find out.

Louisa Bojesen is a CNBC anchor. Twitter: @louisabojesen