Dear European Economy, The ECB Is Here If You Fall Down.

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What's going on?

The European Central Bank (ECB) met today. As was widely expected, it didn’t change interest rates but ECB President Mario Draghi did suggest that the ECB might expand ‘quantitative easing'. He would do this, if the recent weakness in China and emerging markets starts holding back the European recovery.

What does this mean?

QE is the buying of European government bonds by the ECB and, in theory, helps to stimulate economic growth by keeping interest rates very low. With low interest rates, companies are more likely to borrow money to do things like buy machinery and hire workers – things that help grow the economy. Draghi was, effectively, saying that if weakness from the rest of the world infects Europe’s economy, then the ECB will step in and buy even more bonds. As one analyst said, “The ECB has shown markets the safety net.”

Why should I care?

  1. QE is usually good for stocks and bonds but bad for the value of the currency – and that’s exactly how the market reacted with European stocks finishing up 2.5% on the day and the EUR selling off by 1% versus the US dollar.
  2. To some extent, European stocks are protected from further bad news because investors now think that the ECB will step in to support the markets, if things get worse.  
Originally posted as part of the Finimize daily email.

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