Last week, Mario Draghi, the President of the European Central Bank, unveiled a €60bn-a-month public and private bond purchase programme also known as Quantitative Easing (QE). This is the European Central Bank’s latest effort to counter deflation and revitalise the Euro zone. The programme, set begin in March 2015, is expected to extend until September 2016, bringing the total injection of cash to an estimated 1.1 trillion euros.
The measure was well-received by investors as major European indices rose, whilst the Euro reached an 11-year low with respect to the U.S. dollar.
There has been a strong opposition from German officials with regards to the controversial move.
Following pressure from Germany, it has been agreed that each central bank would bear most of the losses (80%) on the bonds it owns.
Angela Merkel said that such a measure should not be an excuse for Eurozone countries to avoid undertaking structural reforms.
Our Key Takeaways from the announcement:
- The Euro should weaken even more with respect to a basket of currencies (including the U.S. Dollar, the Swiss Franc and the Pound Sterling), consequently boosting European firms exports.
- The ECB sends a strong message to the markets in order to combat deflation. Draghi followed through with comments made during his “whatever it takes” speech.
- Prices of government bonds in the Eurozone soared, which in turn drove yields sharply lower to record lows. As government bond yields continue to fall, investors are likely to shift their allocations towards riskier assets such as high yield bonds or equities.
- Despite these positive short term effects, it might be too late already for these policies to have a material lasting impact. Companies in the Euro zone depend less on capital markets than others markets such as the U.S.
For more information, read our recent thought leadership on the macro-economic situation in Europe and the impact to Equities.
Below we've summarized some market reaction to the ECB's decision:
- Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management in London : “People were hoping for more and they got more. This will push investors into higher-yielding assets. Draghi was careful not to exclude the option of extending the program if inflation remains below target. We should have more faith in the euro zone recovery.”
- ING Bank economist Carsten Brzeski : “Instead of keeping some aces up their sleeves, the ECB showed its entire hand: a fully-fledged [quantitative easing] program with exact numbers.”
- Mr Sapin, France's finance minister: “The Germans have taught us to respect the ECB’s independence. They need to remember this too now, for themselves.”
- Laurence Fink, chief executive officer of BlackRock: “We’ve seen over the last few years you have to trust in Mario. The market should never, as we have seen now, doubt Mario.”
- Goldman Sachs’s chief global equity strategist, Peter Oppenheimer: “Deflationary risks have made Europe appear un-investable to many investors. Fading this risk could be worth a lot on current prices and we believe it wouldn’t take much to turn a vicious cycle into a virtuous cycle—at least for a while.”
- Christian Schulz, senior euro-area economist at Berenberg Bank in London: “The ECB left the option open to continue the purchases beyond September 2016. Expectations have risen considerably in recent days, but the ECB still managed to beat most today.”
- Kit Juckes, a macro strategist at Société Générale: “Markets absolutely loved the ECB’s announcement.”
- BNP Paribas economists: “the ECB “surpassed expectations in key aspects of its expanded asset-purchase program, including the scale of the planned buying and its ‘open-ended’ nature.”
- Werner Langen, a leading European Parliament member of Chancellor Angela Merkel’s conservative CDU: “This is wrong, it does not help, it is not the right instrument [to aid economic recovery]. The ECB has reached the end with its monetary policy.”
- Michael Kemmer, chief executive of the German Bankers Association: “The effects of QE will be ‘marginal’ but there will be a noticeably increased risk of asset price bubbles, of mistaken risk assessments and misdirected investment.”
- David Marsh, chair of OMFIF, a forum for central bankers and financiers: “Whatever the exact nature of the . . . programme, the ECB has firmly crossed a fateful line into the world of full-scale politicisation, the opposite of what its purist proponents wanted.”
- Neil Williams, Group Chief Economist at Hermes Investment: “After three years of baby steps, Mr. Draghi has today taken the giant leap forward financial markets were waiting for – but it will be no panacea. Anyone expecting the QE bazooka to quickly fix the problem–a monetary union still devoid of sufficient economic union–will be disappointed. Within the eurozone, shifts in euro members’ competitiveness are still far too disparate for that happen.”
- Munich Re CFO Jorg Schneider: “the European Central Bank’s bond buying program is ‘wrong’ for the eurozone, seeing higher risks for asset bubbles and less incentives for economic reforms. It is illusory to pretend the ECB was purchasing bonds at market price.”
- Aberdeen Asset Management’s Luke Bartholomew: “Markets will cheer the fact that the ECB is going to be buying bonds on this scale, which is ahead of expectations and with a hint of being open-ended. The euro has sold off and QE should further lift asset prices. But the decision that the ECB will only shoulder 20% of the debt on their balance sheet is odd. We shouldn’t get carried away with the scale. It may boost inflation expectations at the margin, but will probably only have a small positive effect on Europe’s real economy. A weaker euro should help exports a little, but it won’t suddenly make European economies much more competitive. That urgently requires structural reforms which European leaders seem unwilling to push through.”