How much of a windfall will European Central Bank quantitative easing be for Europe’s equity investors?
U.S. and Japanese precedent suggest quite a lot. But there are good reasons to be cautious.
As we report Wednesday, the European Central Bank’s executive board is calling for a program of €50 billion ($58 billion) in monthly bond purchases for a minimum of one year, so a total €600 billion, according to people familiar with the matter. Forecasts among analysts have recently centered on a figure of around €500 billion or higher.
These are early days and the full program is yet to be formally announced but so far, here’s how markets have reacted:
Can we expect much more from European equities on Thursday and over the longer term? The Federal Reserve and Bank of Japan QE policies were spectacularly successful at igniting their domestic share markets. And investors are hoping for the same in the eurozone.
The Fed’s first asset purchase program was launched in November 2008, when it started buying mortgages. But Treasury bond sales were kick-started in March of the following year. Since then, the S&P 500 has risen one and a half times, with additional rounds of QE providing spurs to further gains.
In Japan, expectations of massive fiscal and monetary measures, come to be known as Abenomics, started to ramp up shares in the autumn of 2012, since when they’ve more than doubled.
So why think the same won’t happen in the eurozone?
For one thing, because European equities have already advanced by 50% since the worst of the eurozone crisis in the summer of 2012, when ECB President Mario Draghi promised to do “whatever it takes” to ensure the single currency’s existence. It’s worth bearing in mind that in Japan, equities are now up “just” 40% since the Bank of Japan unveiled its QE policy as part of Abenomics in April 2013....MORE