Comments coming into the IFA Magazine office following on from today’s ECB announcement:
Investec Wealth & Investment
Dawn Kendall said:
“Mario Draghi announced the European version of QE and it did not disappoint. Rather than provide a mealy mouthed effort, after a year of planning the ECB has delivered a program that should now define the shape of the European project for an extended period of time. With Germanic attention to detail, this plan has been engineered to within an inch of its life. Now, all eyes will be on the execution. Unlike the UK, US and Japan, the European Union is not homogeneous. In recent weeks, the big question overhanging the market was over risk-sharing and mutualisation. These issues have been addressed clearly and are universally positive.
“The Q&A session after the announcement was illuminating as Draghi was clear that these market operations will be open-ended and not the final solution. So, if we arrive at September 2016 and it has not worked, expect more. He accentuated the fact that bonds are fungible due to currency harmonisation and that the system would be mutually supportive. He was also explicit in this expectation that banks should begin lending to businesses and consumers. With negative ECB deposit rates, there is a very positive incentive for banks to find other uses for the money. Whether European banks and investors will choose to invest in home assets or convert the funding into USD and invest in US real assets is a moot point for the coming weeks and months.
“Immediate market reaction has been positive but it will take a longer period of time to observe exactly how the transmission mechanism of cash from the ECB to banks to consumer will develop. From an economic perspective, future European M3 numbers will give us the clearest indication of the extent of success in putting the cash to work.”
Baring Asset Management
Marino Valensise, Head of the Global Multi Asset Group, said:
“European Central Bank (ECB) President Mario Draghi has announced details of the highly anticipated Eurozone quantitative easing (QE) programme, designed to target persistently low inflation in the currency union. On the 22nd of January he unveiled a larger-than-expected programme of European government bond purchases of €60 billion per month. It will begin in March 2015 and run at least until September 2016, implying an overall injection of €1.1 trillion of liquidity into the Eurozone.
“The pool of assets the ECB will be targeting is very broad, including euro-denominated government and agency debt ranging between 2 and 30 years. Critically, this programme is ‘open-ended,’ so it will stay in place until inflation expectations in the Eurozone are back on track near the ECB’s mandate of inflation below but close to 2%.
“Prior to the announcement there was much discussion of how the risks of QE would be shared across the Eurozone, and the ECB seems to have achieved a compromise here. To maintain the principle of risk sharing across the Eurozone, risks will be shared on 20% of the overall purchases, with the remaining 80% taken by the national central banks, a decision Mr Draghi attributed to the large size of the programme.
“Given the practical and political constraints on the ECB, we believe the announcement will be welcomed by the market. The programme was slightly above market expectations, which had previously been for a programme of €50 billion per month and with no risk sharing.
“Mr Draghi also revealed that while the ECB was unanimous in its agreement that this specific programme is a legitimate monetary policy tool (importantly implying support from Germany on its legitimacy), there was debate over the urgency of deploying the programme now.
“With this announcement the ECB has signalled its commitment to achieving target inflation, and that it wants to see portfolio rebalancing in the Eurozone away from government bonds and towards corporate loans and other higher risk securities, as we mentioned in our recent monthly asset allocation commentary (“Central Bang,” 21 January 2015).
“Eurozone QE might also lead to a weaker euro, which will support higher inflation, though Mr Draghi emphasised that this was not an explicit target of the policy.
“We believe this announcement is supportive for bonds, given the broad scope of the programme. We expect the risk premium attached to peripheral European government bonds versus German bunds to remain well behaved.
“The ECB has exhibited some discipline by saying it will not acquire more than 25% of a single issue or 33% of an issuer’s entire debt. The programme will also include Greek debt, provided Greece continues to comply with its existing commitments. The announcement should also be positive for stocks given bond yields will remain low. However we think most of the positive impact in the short term will be felt in the bond markets. Other income-generating assets such as high dividend stocks will benefit as income will be in demand.
“Finally, we concur with Mr Draghi’s sentiment that QE is unlikely to lead to hyperinflation. The ECB has been easing policy for years, and inflation has remained persistently low, suggesting that monetary action taken to date has not been sufficient to shock the economy onto a higher growth and inflation trajectory. The experience of QE in the United States also supports this view. Whether Mr Draghi’s QE ‘bazooka’ will finally achieve this goal now remains to be seen.”
Lombard Odier Investment Managers
Salman Ahmed, Global Strategist, said:
“The decision. Earlier today, the ECB announced a monthly €60bn per month quantitative easing program, which Mr. Draghi said will continue until September 2016. He also commented that purchases can potentially continue until inflation expectations rise towards the 2% target. The additional sovereign purchases were not mutualised (with the exception of agency debt) which Mr Draghi characterised as an attempt to mitigate the fiscal implications of QE policy on national central banks.
“In terms of size and other parameters, the program was certainly towards the dovish end of market estimates and the explicit linkage to inflation expectations suggests there is scope for further extensions to the program.
“The backdrop. The adoption of the easing program has been slow compared to other advanced economies, given the philosophical and political issues within the ECB’s governing council. Specifically, it has taken a lot of time (and weak data) to convince the German contingent that QE is required to improve economic outcomes in the eurozone. The region is now in deflation (latest print of -0.2% yoy) and the growth outlook looks both uneven and anaemic.
“Until recently, the German bloc led by Mr. Weidman (supported by Ms. Merkel) had continued to argue that QE will blunt individual government incentives for reform. In addition, there had also been a sharp debate on the risk sharing front, where the prospects of national central banks (rather than the ECB itself) buying the respective sovereign paper had been raised. Technically, whether the risk sits on national central banks or the ECB matters less from a practical point of view, but it does signal the health of the current political consensus.
“The ECB decided to not risk additional sovereign purchases but Mr. Draghi spent a lot of time defending this decision and differentiated between application of monetary policy vs crisis fighting (ie he said Outright Monetary Transactions (OMT) are risk shared so mutualisation is an integral part of ECB policy).
“What is QE supposed to achieve? The main transmission channel through which ECB intervention is supposed to work is through the signaling effect on inflation expectations. Whether this can be achieved remains to be seen. Real yields are already quite low in the eurozone (-0.3%) and recent monetary policy easing moves have been met with little success as inflation expectations (both survey and pricing) have continued to fall. Indeed, the latest downshift has come at a time when inflation expectations have fallen across the world on the back of falling oil prices.
“Despite the stronger than expected program announced today, the longevity and size of the impact on inflation expectations remains to be seen, given the combination of structural and cyclical issues facing the eurozone economy.
“The second important goal of deploying QE is to ease financial conditions further. The ECB has an expectation of easing in recent months and this has already done a significant part of the job (so the surprise factor is weaker) as eurozone yields have fallen sharply over the last 6 months. In addition, the weakness in the euro further adds to the easing of financial conditions which has happened to date. Given how low rates are already, we think the more dovish than expected program will continue to manifest itself in a weaker euro.
“European fixed income and FX outlook. Support for European fixed income (both sovereigns and corporates) looks likely to remain intact after the announcement of the program. Interest rates will have to remain low or go lower in order to provide the necessary stimulus to the economy. Given structural issues and faulty transmission channels, we think the ECB will have to continue with asset purchases for the foreseeable future particularly as deflation is likely to worsen in coming months to keep pressure on rates and FX intact.”
Heartwood Investment Management
Jaisal Pastakia, investment manager, said:
“€1.1 trillion is a number that many had been talking about in the lead up to Draghi’s announcement. It’s a big number – it gets the balance sheet to where he wanted it (€3 trillion) – but many had already expected it. The 5 year/5 year forward rate of inflation expectations shot up yesterday afternoon, but it has reversed that move post the announcement.
“We will need to look out for details. While we know that bond buying will take place along the curve all the way to 30-year maturities, we don’t know the split between public and private assets.
“With interest on TLTROs reduced, banks have more incentive to lend….but we will need to see whether this transpires. Once again, Draghi provided a reminder that the onus is now on governments to move the reform agenda forward and raise the longer-term trend of growth.”
Henderson Global Investors
Tim Stevenson, fund manager of the Henderson Horizon Pan European Equity Fund and Henderson EuroTrust plc, said:
“The ECB has embarked on a much larger version of QE than originally expected. Questions about whether it can be effective at current interest rate levels, whether it is needed and alleged opposition from Germany are possibly less important right now than the simple fact that the ECB is taking decisive action. This should encourage confidence in the midst of a nervous economic climate in European business.
“The scale of purchasing is significant, at up to €60bn a month, starting in March 2015 and expiring September 2016. This should help European economies to improve. There have been tentative signs recently (ECB bank lending survey, money supply data and German ZEW confidence surveys) that Europe’s economies are picking up very slowly – perhaps showing as we suspected that the Asset Quality Review (AQR) at the end of last year had indeed been acting as a blockage in the transmission pipe of previous ECB measures, such as TLTRO. But in the end, markets were screaming for intervention, and if the ECB had done nothing mayhem might have ensued. The decision was not unanimous, but it sounds like opposition was limited (no vote was needed).
“Once again ECB President Mario Draghi took the opportunity to reiterate the need for structural reform in Europe. Axel Weber (former Bundesbank President and now Chairman of UBS) made this point very clearly in the report of his interview from Davos. I interpret Draghi’s comments as saying that there is no more that the Central Bank can do – it is now over to Europe’s governments to get on with reform. He has provided the framework; now they must do their part.
“Perhaps the announcement of QE will be enough for markets to now focus on some facts: European markets are cheap relative to the USA – perhaps for good reason, but at extreme levels. Against their own history they are expensive in price/earnings (PE) ratio terms, but attractive from an income perspective. Furthermore, economies are improving, slowly. Finally, the falling oil price is acting as a massive boost for the consumer and a weaker euro vs the US dollar is a major benefit for European exporters.”
Signia Wealth
Gautam Batra, Investment Strategist, said:
“The markets were hoping for drastic action from the ECB today, namely a clear plan for the scale, duration, and mutualisation of a significant Quantitative Easing programme. They already appear to be heartened to see the announcement of €60 billion a month, commencing in March, with some risk sharing across the EU.
“This is a milestone announcement from the ECB and will go some way to support market sentiment. However, the outcome of the Greek election on Sunday is a much more acute risk to market stability in the near term.”
(before the statement was issued)
Julius Baer
David Kohl, Global Head Fx Research, said:
“Financial markets might welcome today’s ECB action but for the economy a QE programme is less important.
“Expectations in view of today’s meeting of the ECB are extremely high. We seriously doubt that the ECB will be able to fulfil or surpass these expectations and to convincingly deliver a game-changing stimulus for the eurozone economy. Speculations are most intense about an upcoming large-scale asset-purchasing programme (QE) with a volume of at least EUR500bn and up to EUR1,500bn. The most likely outcome is a comparably smaller EUR500bn programme with possible limitations when it comes to the rating of the (then to be) purchased government bonds, a maximum share of a single national bond market and the full liability of the ECB or Eurosystem as a whole for the acquired governments bonds. Hence, the programme might turn out to be too small and not bold enough to be regarded as a game changer. In addition, liquidity and in particular central bank liquidity are currently not the binding constraint for the eurozone economy and the eurozone banks. Bond yields and peripheral spreads are already deeply depressed, the euro is seriously undervalued i.e. cheap, and inflation is low or negative due to lower oil prices and weak demand, which makes inflation pretty independent from central bank liquidity measures. Hence, we see very little impact on the eurozone growth and the inflation outlook from the ECB’s decision today.”
Christoph Riniker, Equity Strategy Research, commented:
“The potential announcement of QE by the ECB today should have a positive impact on eurozone equities. We are increasing the eurozone and Germany to overweight. Since there remains room for some disappointment, we are downgrading Spanish equities to neutral as a risk hedge to this scenario. On a medium-term perspective, we remain of the opinion that eurozone equities should see more potential than US equities based on various fundamental factors. Shortly after the publication of our note Bloomberg reported that the ECB said to propose QE of EUR50bn per month until the end of 2016. Being still a rumour, the markets reacted positively immediately.
“We expect QE (also after the confirmation today) to have a positive impact on eurozone equities.”
