Euro, Bund Yields Slide, Stocks Rebound As Draghi Clears Way For More Stimulus

We're amazed that anybody could still be surprised that the European Central Bank might be heading toward more stimulus, particularly after Mario Draghi's "whatever it takes 2.0" comment earlier this year, but nevertheless, the euro sank and markets shifted into a decidedly more risk-on mode after the outgoing central bank president said during the ECB's annual conference in Sintra, Portugal that interest-rate cuts are part of the central bank's "toolkit," and asset purchases are also an option.

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Italian bonds extended gains, outperforming other peripheral peers, while the yield on the 10-year German bund fell to a fresh asll-time low, in response to Draghi's remarks. The European Stoxx 600 Index erased earlier declines of as much as 0.5% to rise 0.4%, and the euro erased earlier gains. S&P 500 futures extend gains to a session high at 0.3%, tracking European shares.

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Banking stocks were the largest decliners, while miners outperformed.

Draghi said risk outlook "remains tilted to the downside," and that more stimulus will be needed if the outlook doesn’t improve. More interest-rate cuts and more QE are part of the central bank's arsenal, Draghi said.

"The prolongation of risks has weighed on exports and in particular on manufacturing. In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required."

And the central bank will do whatever it feels is necessary to live up to its mandate.

“The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfill our mandate - and we will do so again to answer any challenges to price stability in the future,” Draghi said.

In an example of central bankers speaking gibberish to sound sophisticated, Draghi added that the ECB is able to enhance forward guidance by "adjusting its bias and its conditionality to account for variations in the adjustment path of inflation."

Draghi said risks from geopolitical factors, protectionism and vulnerabilities in emerging markets have not dissipated and are weighing on the Continent's manufacturing industry. Major central banks around the world have taken a dovish turn since the start of the year, with many blaming the drop in global trade. Later this week, both the Fed and BoJ will meet, and, with markets pricing in ever-greater chances of a Fed rate cut that some believe could arrive as soon as Wednesday.

To underscore Draghi's point, Germany's ZEW investor expectations index tumbled to -21.1, far below the estimate of -5.6, a sign that sentiment continues to deteriorate.