Volatility remained very high on global financial markets last week.
Commodities and stocks continued to plunge in the first half of the week, with the moves taking many of the world’s main equity markets down more than 20% from their 2015 highs — the common definition of a bear market.
Meanwhile, oil prices fell to close on $26 a barrel, their lowest level since 2003. Sterling also remained under pressure, with cable (the GBP/USD currency pair rate) falling below $1.41, its lowest level since 2009.
However, markets rebounded later in the week after the ECB signalled that further monetary easing would be considered at its next policy meeting in March.
ECB President Draghi vowed that “we are not surrendering in front of these global factors” as the ECB continues to battle to get inflation back up close to target.
He said that the ECB has “the power, the willingness, and the determination to act”.
It acknowledged that conditions on markets have worsened since its last meeting in early December.
In its statement, the ECB noted that downside risks for the eurozone have increased amid “heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks”.
The ECB statement gave a strong signal that more easing was likely sooner rather than later.
It noted that it will be “necessary to review and possibly reconsider our monetary policy stance at our next meeting”, which takes place on March 10.
The reason that additional policy easing may be required is that the recent further sharp declines in commodity prices mean that the ECB’s expected path of annual HICP inflation is now significantly lower compared with the outlook in early December.
At that time, oil prices had been forecast by the ECB to average $52 a barrel this year.
Mr Draghi indicated that given their persistence, size and potential for negative second round price effects, the falls in commodity prices could not simply be looked through.
The ECB is clearly worried that the collapse in commodity prices increases the risk that inflation will remain extremely low for an extended period of time.
President Draghi stated that the Governing Council was “unanimous” in the view that there would be a need to reconsider policy in March.
While the ECB did not specify what form additional easing measures might take, it is likely to include another cut to the deposit rate, which is already in negative territory at -0.3%.
Markets are now pricing in a further 10bps cut in the deposit rate, taking it down to -0.4%.
There is also likely to be an increase in the volume of asset purchases under its QE programme, which is currently running at €60 billion per month.
There is speculation the Bank of Japan might also ease policy further.
It is due to meet later this week and may signal that it will consider increasing the size of its QE asset purchase programme.
The US Fed also has a policy meeting this week.
The most recent projections from Fed policymakers show that they expected to raise interest rates by 25bps in each quarter this year.
However, current futures pricing indicates that markets are now anticipating just one rate hike in 2016, towards the end of the year.
It seems then, that central banks may once again be riding to the rescue of financial markets.
Not for the first time in his central bank career, Mr Draghi’s strong words last week had a soothing effect on markets as they rebounded.
Still, stock markets are unlikely to settle down until we see some stability in commodity prices as this is a pre-requisite for an improvement in the outlook for emerging economies, as well as hard-hit mining and oil stocks.
Commodity prices have now fallen to very low levels, so we should begin to see some reductions in supply.
Thus, prices could now be approaching a floor although it seems unlikely they will recover anytime soon as output and inventory levels remain high.
Instead, we could see lots of volatility in commodity prices in the months ahead.
Oliver Mangan is chief economist at AIB.
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