Nicholas Wall (pictured), portfolio manager, Invesco fixed income, has commented the European Central Bank’s last move, describing it as very bold and very bullish for risk assets.
Among measures announced by the ECB, the deposit rate has been trimmed by 10bps to -0.40% and the refi rate by 5bps to 0%.
Also the ECB will now purchase €80bn of European debt monthly against €60bn previously through its quantitative easing program, with European non-financial corporates issuing in euros being included in the program.
Wall said one of the biggest differences between the ECB and the Fed’s QE operations was the impact it had on portfolio substitution.
“The Fed’s QE operation saw the Treasury curve sell-off and stocks rally, whereas in Europe many investors bought duration. The volatility-adjusted returns were much greater owning bunds than buying credit as the ECB continued to lower the depo rate bring safe haven assets large capital gains,” Wall argued.
“So the biggest impact the ECB could have had today was to shift investors up the risk spectrum and hold their hand while doing so given global market volatility – this is exactly what the ECB have done today by announcing that it would buy credit assets.
“The ECB have also taken real care not damage sentiment towards the banks that could resulted from deeply negative rates – they have offered further LTROs, cut the refinancing rate and announced that banks will be paid 0.40% to borrow from them (against the best collateral).
“There has been a shift away from competitive devaluation and towards credit easing, bolstering the transmission mechanism from ECB policy decisions to the real economy. It is a large easing in European financial conditions,” Walls commented.
According to Wall, ECB’s move is a message from Draghi to the markets “that it’s ok to buy European risk assets.”