Mario Draghi under pressure to deliver extra stimulus

Much of the interest around this week's trading calendar has been set around the decision by the ECB pertaining to additional measures of stimulus that's being expected to be made today when ECB president Mario Draghi makes his announcement later this afternoon. A lot rests on his shoulders with major expectations for the central bank to use every possible weapon in its arsenal to arrest deflation and return the European economy back to growth.

But Draghi hasn't drawn the perfect picture for market participants to grasp onto with a shock decision made in December 2015 that came across more hawkish than dovish which was the counter to what was expected. However the tone changed somewhat when Draghi appeared at the annual World Economic Forum held in Davos in January where he said that the ECB was considering upping the ante on its stimulus program as early as March as well as placing emphasis on the line "lower for longer"in reference to the interest rate set by the central bank.

These mixed messages have placed a great degree of nervousness around today's announcement with many fearing an unexpected surprise that could alter the entire course of the Euro currency against other major currencies and as a result we've seen a weaker Euro building up to today as the stakes remain high on the outcome.

There are a number of points participants have said they will be watching closely for, such as the level of decrease it sees the interest rate to be dropped to, whether the amount of bond purchases will remain the same or be increased and Draghi's forecast to how far the current QE program will be in existence with some looking for further extension past 2017.

5 things to look out for when Mario Draghi announces ECB's latest decisions https://t.co/dKNeQi4tUE pic.twitter.com/nMvqwqZnI3

— Bloomberg Business (@business) March 10, 2016

Draghi will be under pressure to deliver accordingly or else face further setbacks in an effort to prove that the measures put in place are sufficient to reach the ECB goals of defeating deflation. Partly to blame for the lack of confidence in the central bank have been a number of international issues dragging down global investor confidence such as China's failure to reignite growth and the US gradual but slow recovery that has yet to inspire much faith in worldwide stability.

This chart found in an article on Bloomberg expresses the belief that the efforts by the ECB have failed to spur on European equities with the chart representing the Stoxx 50, the largest 50 companies in the EU. Although Europe has much more listed equities than the selected few exhibited in the index it does serve as a gauge of investors mood to investing in European equities. 

The ECB is not only fighting against external economic matters that press it to take corrective measures but of the four events highlights three resided in Europe adding further weight to the downbeat conditions experienced over the past year. It suggests that investors need to place greater pressure on the government's within the EU region to form a common consensus over the direction it is headed too instead of finding continual resolve in the ECB expanding monetary stimulus. The longer disunity in the EU remains the less effective ECB policy measures become as the timeframe of any economic policy is limited. The notion of extending specific policy further away from the intended time lapse only adds additional risk to an eventual ending. 

Draghi will also be reluctant to pass on negative interest on excess reserves to banks who have seen a dramatic selloff recently following concerns that the debt taken on during the shale gas boom might be close to implosion if the oil price doesn't recover fast enough. The ECB is partly to blame for the situation developing in the way it has as interest rates being so low has squeezed banks margins significantly prompting them to find better returns in riskier assets. 

However the added risk has exposed these banks to more potential damage than they would be use too and thus any further decrease in the interest rate would place grave consequences for banks in the medium term. This is why participants will be on the lookout for how Draghi will implement NIRP (negative interest rate policy) with the current trend set by the Bank of Japan recently who applied a system of tiered excess reserves that determined which reserves would be obliged to be pay over a charge for storing cash. 

Having this amount of considerations to apply thought too does leave open the possibilities of Draghi slipping up which can be sensed in the mood of the market currently. One does hope that Draghi comes into this announcement prepared but we can never be certain especially after the events of December that shocked the markets. The best course of action would be to wait on the sidelines and wait and see how the market responds as this does have the potential to move markets globally.