From Barron's Income Investing:
The European Central Bank finally unveiled its hotly
anticipated stimulus plans, — a bigger than expected bond-buying
program that has the central bank snatching up €60 billion in bonds and
other assets every month to boost prices and encourage lending across
its member states.
For how long? ECB President Mario Draghi says the central bank will buy until lit sees sustained inflation improvement
With the news out of the barn, the euro weakened compared to the U.S.
dollar. But bond prices rallied, yields fell and stocks across Europe
rose.
In the U.S., the Dow industrials have had a volatile morning, opening
85 points higher before dropping into the red and rebounding again, all
within the first hour of trading. Meanwhile, the price for the 10-year
Treasury note rose 2/32 to 103-14/32 and the yield fell to 1.86%.
So how are market observers reacting?
Evercore ISI’s Dennis DeBusschere argues it could take time “for the dust to settle.” As he puts it:
Some concern on the drop in oil and muted reaction to
the announcement so far, but most other indicators on our dashboard
still ok as Euro is lower, inflation expectations higher and yield curve
still steeper. With bund yields lower and European inflation
expectations higher on the day, that is a decrease in real expected
yields and positive in theory (rates dropping as expected inflation
increases). Will take some days for dust to settle though, so still very
hard to make bold calls on these policy moves. Next up on the agenda?
The divergence between the Fed and the market on the path of Fed funds…
Sterne Agee chief economist Lindsey Piegza calls
it a “step in the right direction,” but equates the move to “an attempt
to put out a fire with a drop of water when clearly a bucket is needed.”
She tells us:
Widely expected and already priced into the market,
the ECB’s announcement gives hope (potentially unfounded hope) that the
central bank will be able to spark growth into a sluggish euro area and
counter declining prices. After all, Though the size was larger than
expected – 60 vs 50- the relatively small size compared to what was done
in the us, leaves confidence shaky in terms of how much benefit the
program can actually have.
With rapidly declining prices and minimal tenths of growth across
the four largest European economies, the size of the program needed to
jolt life back into Europe is likely to prove significantly larger than
what was announced, putting more pressure on Draghi’s long standing
commitment to “whatever it takes” to eventually translate into a
markedly larger program over the next months or year
Nick Colas chief market strategist at Convergex agrees the ECB’s move was “well telegraphed,” but warns that some worry it could devolve into a currency war.
What I am hearing from clients is, ”fine, now what.”
In other words, how does the money get to the real economy in Europe?.
In the U.S., QE worked by moving asset prices up and made those who own
financial assets wealthier which translates into greater consumer
spending. In Europe, not as many people own financial assets, so the
hope is that QE will drive down the euro and make the export base more
competitive. The concern is that it is just a currency war now with the
U.S. dollar…QE of any type is an imperfect means of improving an
economy… If it is aimed at making European exporters more competitive
than other countries will eventually have to respond.
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