Having maintained a strong run since the start of the New Year, global markets paused for breath this week, with the MSCI All Country World Index falling back -0.56% from the perspective of a Sterling-based investor. The FTSE All Share fell -0.19%, while the USA underperformed European markets for a change -1.04% vs -0.77%, this is counter to the longer-term trend of US outperformance.

Emerging Markets were the bright spot, rising +0.23%, driven by the Chinese stock market, which rose +1.05%. Fixed Income performed as anticipated in a risk-off environment, with the Barclays Global Aggregate Index rising +0.65% when hedged back to Sterling. This was predominately driven by government debt. The Pound Sterling fell against all major global currencies over the course of the week, primarily driven by Brexit-related worries.

Last week’s big macroeconomic event was the European Central Bank’s (ECB) decision, by Mario Draghi, to shift monetary policy movements into reverse. A move that was triggered by the steep drop in projections for the Eurozone’s GDP growth for 2019, from +1.7% to +1.1%. The monetary loosening was evidenced by the increased volume of cheap loans offered to European banks, as well as limiting the likelihood of an interest rate rise in the future.

This move went further than most economists anticipated. Despite the renewed source of cheap funding on offer, the shares of European banks were hit hard with the EuroStoxx Bank Index falling -5% on the day in Euros. It appears that the ECB tightening policy was too bold for some and has since slowed the European economy a little too much.

The state of the European economy, now exacerbated by the actions of the ECB, is not too different to the situation in 2011. When President of the ECB Jean-Claude Trichet over-reacted to accelerating inflation and raised interest rates. A disastrous policy error that drove the Eurozone back into recession and contributed to 10 years of lost growth.

While the optimists amongst hope that the current slowdown will not be as deep or prolonged as the one in 2011, the Eurozone economy is heavily dependent on exports and suffers disproportionally from the risks posed by Brexit and the US-China trade dispute. Mario Draghi would do well to revisit the errors of his predecessor.