ECB counting on return to normality, suggests JPMAM’s Dan Morris
Dan Morris, Global Strategist at JP Morgan Asset Management, says the movement in yields over the past week suggests the ECB may be counting on markets to find a solution, instead of ECB intervention.
In many ways, a lot and nothing has changed following the most recent EU summit. What has changed is the new proposed agreement for most of the EU members to increase fiscal coordination, and to impose sanctions on those countries that do not abide by the rules.
The hope is that this will suffice to convince institutional investors to buy eurozone sovereign debt again. Given previous experience with the Stability and Growth Pact, and the inevitable uncertainly as the exact details are negotiated between now and the target adoption date of March, it is unlikely to do so.
More forceful measures, such as eurobonds or unlimited ECB bond purchases, remain politically inconceivable. What hasn’t changed is that it will be a combination of ECB support for banks and sovereigns, plus individual country progress on reform and austerity packages, which will determine how markets move over the next several months.
The ECB has been much more active in aiding the banking system, for example by promising liquidity for three years and easing collateral requirements, than in helping sovereigns. Purchases of sovereign debt have actually declined since the latest round began in August, but encouragingly there was still a sharp drop in Italian and Spanish government debt yields.
Trading volumes for the debt of troubled eurozone countries have been very low, meaning that even a small amount of purchases (or sales), can have a dramatic affect on yields. Advances in Belgium, Greece, and Italy have been ignored of late, but the decline in yields over the last week show that it is possible for them to return to supportable levels without major ECB intervention. This seems to be what the central bank is counting on.
Dan Morris is Global Strategist at JP Morgan Asset Management