Industry responds to eurozone QE
Following on from the ECB announcement to purchase €60bn monthly, InvestmentEuope has gathered industry responses to the move.
While the initial response is positive, there are also concerns about the long-term effectiveness of the programme: Azad Zangana, senior European economist and strategist and Rory Bateman, head of UK and European Equities Schroders comments: “The obvious question is will QE make a difference, especially as government bond yields in Europe are already so low? There is certainly scope for bond yields in peripheral Europe to fall further, and for those lower interest rates to feed through to the real economy via the banking system, however, we feel that the main impact will come through from the weaker euro, which will make European exporters more competitive internationally.”
“Despite the decision being largely in line with consensus expectations, the Euro lost ground against major currencies. We expect that the ECB QE programme will lead to flatter yield curves across the eurozone and that widening rate differentials will continue to weigh on the Euro against major currencies”, says Martin Arnold, director – global FX and commodity strategist at ETF Securities.
Despite the size of the QE package exceeding expectations, some are still disappointed with its content: Bryn Jones, head of Fixed Income at Rathbones. “We are disappointed that the ECB has not taken the opportunity to buy corporate bonds, which we believe would have better prompted companies to invest and helped to shift the deflationary glut. What does it say about European growth prospects if investors are willing to buy at negative yields? Not much. We think the impact of this exercise is limited considering where yields are already. Mario Draghi has had quite a few open goals; this is yet another missed opportunity.”
The concern about purchasing sovereign bonds in the current low yield environment is echoed by others, Simon Derrick, chief currency strategist at BNY Mellon comments: “Beyond wondering why the ECB seemed so keen to telegraph its intentions to do something ahead of today’s meeting (was it trying to avoid the kind of market disruption seen last week when the SNB abandoned its “minimum exchange rate” policy?) the real question now is quite what the policy is intended to achieve. Given that bond yields across much of Europe (Greece excepted) are trading at historic lows, it is difficult to argue that the programme is targeting borrowing costs.
John Vail, chief global strategist at Nikko Asset Management adds: “Even though the ECB allowed the purchase of bonds with negative interest rates, it is not clear if the Bundesbank and other conservative central banks will purchase such, meaning that the E60BB/month target might not be achieved. Allowing purchases in the 2-30Y maturity does open up the possibility of going further out on the yield curve to avoid negative yields, but the Bundesbank might not want to do that either with its portion of the German allotment (which is a large portion of the total plan) because it is rather risky.
“The market was pleased with the perceived commitment (but is officially just an “intention”) of monthly purchases through September 2016 and perhaps thereafter. Many thought that 2016 would not be officially included in the “commitment” but everyone should realize that if the ECB is satisfied with the outlook, it can halt QE anytime. Thus, essentially, the ECB is actually data-dependent but with a patient perspective.”
Another outstanding concern seems to be the approach towards risk sharing the ECB has taken: Frank Engels, head of Fixed Income at Union Investment comments:
The ECB’s decision to transfer the risk of the bond purchases mostly to national central banks is, however, counterproductive. This will lead to a further fragmentation of the Eurosystem and could, at least temporarily, cancel out any positive effects from the programme of quantitative easing, particularly in the case of periphery countries.
Erik Weisman, Fixed Income Portfolio Manager with MFS Investment Management agrees: “While the initial reaction to the announcement has been positive, the key problem with the structure of this programme rests on the decision to place 80% of the asset purchases on the individual national central banks’ balance sheets. This is a step backwards and is antithetical to the broader goals of the monetary union. It serves as further proof that the eurozone lacks a true banking, fiscal and political union.”