Swiss & Global’s Angele asks: What is different in latest ECB programme?

Stefan Angele, head of Investment Management, Swiss & Global Asset Management, reviews the week and poses the question whether the ECB really has done anything new in its latest announcement.

Stock markets rose after the announcement of European Central Bank (ECB) president Mario Draghi to start conducting an Outright Monetary Transactions (OMT). Consequently, Spanish, Italian, Portuguese and even Greek bond yields fell sharply. The price for gold and crude oil declined to USD1690/oz and USD95/bbl, respectively.

Yesterday, the Governing Council of the ECB decided on the modalities of its OMT in secondary government bond markets. Policy makers agreed to an unlimited bond-purchase programme with maturities of between one and three years to regain control of interest rates in the euro area and fight speculation of a currency breakup. Yet, governments must stand ready to activate the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) in the bond market should exceptional financial-market circumstances and risks to financial stability exist. The ECB reserves the right to end bond purchases if governments do not fulfil their part of the bargain. There is no yield target or cap, but a commitment to continue to support governments as long as it takes, provided that countries ask for primary market support from the EFSF/ESM and as long as they comply with the conditionality.

What is different from the ECB’s last two programmes? The countries will be subject to a strict and effective conditionality, and the programme is unlimited and transparent.

Moody’s Investors Service cut the outlook for the European Union to negative from stable on the Aaa long-term issuer rating and on the provisional (P) Aaa rating of the EU’s medium-term note programme. The downgrade reflects the negative outlooks assigned to Germany, France, the UK and the Netherlands, which account for 45% of the EU’s budget revenue.

It is reasonable to assume that the EU’s creditworthiness should not be above that of its strongest key member states. These states would likely not prioritise their commitment to backstop the EU debt obligations over servicing their own debt obligations.

Global manufacturing weakened further in August. The global manufacturing purchasing managers’ index slipped from 48.4 in July to 48.1 in August. This is now the lowest level since June 2009 and points towards very modest annualised global GDP growth of less than 2%. Surprisingly, the only major region for which the business surveys improved slightly in August is Europe. At a level of 45.1, it remains, however, deep in contraction territory and is consistent with steep annual falls in industrial production. The Chinese Manufacturing PMI came in worse than expected, falling to 49.2. This reinforced recent evidence that the Chinese economy is not (yet) responding to the authorities’ stimulus efforts.

The latest PMI surveys for August suggest that the global recovery has weakened steadily after having picked up a bit in the first few months of 2012. This is likely to encourage the major central banks to offer more policy response. However, it remains to be seen whether further monetary stimulus can have a significant positive impact on economic activity.

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