After what seems like an eternity of speculation on will he/ won’t he, the arrival date for Mario Draghi’s Quantitative Easing programme (a mere 7 years after the USA one and with bond rates starting at least 200 bps closer to the zero bound) is here. On the 22nd the European Central Bank (ECB) will announce what QE it will do, if any, barring any last minute legal issues.
Some thoughts on QE and the ECB:
1. It is still hard to be sure that QE is responsible for the US economic recovery, or was it just a cyclical recovery made easier by the fact that by global standards, the US economy has a lot of flexibility and dynamism?
So whilst this chart is often rolled out:
Source: Minack Advisors
2. We would counter this – that by mid-2011, S&P 500 margins had returned to their prior peak:
Source: Minack Advisors
If it was the case that QE made a difference in the US, can we expect such a good response in Europe? Our reasons for scepticism include:
All of which raise questions whether the process would work
3. If Japan is any precedent for Europe, then the only sure thing we can expect even from ‘large’ QE in Europe is a weak Euro, as Japan’s huge amount of money printing has only just moved the dial on deflation, the economy remains stagnant, but the yen has fallen massively.
Source: Minack Advisors
Source: Minack Advisors
Our conclusion? Remain cautious on Europe, and underweight Continental European equities as this could be tails? “You lose”, heads? “You lose” environment. If the ECB does come through with something reasonable, much of it may already be in the market, and a lot of the gains on shares may be eaten up by currency losses. If the ECB doesn’t do what is expected/hoped for, there is going to be another round of concern about the sustainability of the Euro.
There is also the small matter of Santander Bank having to do an overnight E7.5bn equity issue on Friday, a company that only recently passed the ECB stress test…but whoever asked a question they didn’t know the answer to?
Santander is denying it has raised the money for M&A. If that is true (and there are rumours it wants to buy Italy’s stricken Monte Dei Paschi di Siena) it suggests it has worked out that it still doesn’t have enough capital. If that is true of Santander, then the rest of the European banking system is in a very bad way still.
For more on this, you may want to have a look at http://www.ft.com/cms/s/0/c27ebe62-99a5-11e4-93c1-00144feabdc0.html#axzz3OZmgsWsl
Subscribe now to get the latest reports and insights from
Morphic Asset Management.