Starting in March and with a pencilled-in end date of September 2016, the QE programme will be sized at least €1.1trn - much larger than the €500bn that was being expected by investors. Markets seem to have reacted positively but, as we shall see below, some fund managers remain cautious over the move.
ECB president Mario Draghi had been under pressure to make good on his pledge to do “whatever it takes” to save the eurozone in recent months, after fresh bumps in the currency bloc’s economic recovery and a recent tumble into deflation.
Following its monetary policy meeting today, a statement from the central bank said interest rates were being maintained at the current levels but “further monetary policy measures will be communicated by the president of the ECB at a press conference”.
Speaking at the conference, Draghi revealed that the bank intends to launch an “expanded asset purchase programme” from March 2015. This programme will include buying euro-denominated investment-grade securities issued by eurozone governments in the secondary market.
“Under this expanded programme, the combined monthly purchases of public and private sector securities will amount to €60bn,” he said.
“They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 per cent over the medium term.”
National central banks will take most of the responsibility for losses from default or restructuring of their national debt, after Germany applied strong pressure for this feature. However, welcome news included the provision that there will be risk-sharing on 20 per cent of the assets.
European stocks jumped on the news. Investors took cheer – anything below €500bn was likely to have disappointed – while the promise that the programme will be maintained until inflation targets are in sight suggests an element of open-endedness that will also be welcome.
In the bond markets, yields dropped in the periphery, such as Italy and Spain, but rose in the core markets of France and Germany. Meanwhile, the euro fell to an 11-year low against the dollar.
Markets and investors are still digesting the full impact of the news but in the following article we present the immediate reactions from fund managers, strategists and economists across the industry. Responses range from very optimistic to downright negative, so we’ll be putting the implications for fund investors under the microscope in future articles.
Old Mutual Global Investors: “QE programmes often don’t produce the effects you’d assume”
John Ventre, head of multi-asset, said: “Last year I called the ECB the blue helmets of Europe, equating them to UN peacekeepers. When the peacekeepers arrive in a warzone, I expect things to stabilise but I don’t really expect the problem to be solved. In our view, the problem in Europe isn’t a lack of money supply it’s a lack of credit growth. Depending on who you listen to, this is either because banks don’t want to lend because they’re busy deleveraging or because businesses don’t want to borrow because they are short of ideas and confidence.”
“Although the market adage ‘don’t fight the central bank’ does generally hold true, investors need to beware. QE programmes often don’t produce the effects you would assume. Through many rounds of QE in the US, the dollar ended up more or less where it started and bond yields rose while the Fed was buying them and fell while the Fed wasn’t.”
Stewart Cowley, investment director of fixed income and macro, added: "Besides surprising the market with a slightly larger than expected monthly programme of €60bn a month, the ECB have finally delivered on their ‘whatever it takes’ statement. It remains doubtful that this European-style QE will work in any way other than to prop up a system as opposed to propelling it. One of the main and subtle parts of Mr Draghi's speech was to finally admit that the US and Europe are now on different paths setting the scene for the divergence between government bond market performance in the future and a further substantial decline in the euro relative to the US dollar in particular."
Threadneedle: “ [QE] should be welcomed with optimism”
Martin Harvey, fixed income portfolio manager, commented: “Given all the leaked information in the past couple of weeks, it was hard for Draghi to over-deliver today, but looking at the bigger picture, a sovereign bond buying programme on this scale would have been unthinkable only a few months ago, so should be welcomed with optimism.”
“It is generally accepted that the impact on the eurozone economy will be small, but it will be an added positive at a time when lower energy prices and loosening credit conditions are also providing a tailwind. Furthermore, the commitment to do ‘whatever it takes’ to combat deflation risk should provide a boost to confidence. Draghi’s finest hour as ECB president to date was the skilful negotiation of the OMT programme at the height of the euro crisis. QE might not hold quite so much significance in the turbulent history of the euro project, but we should think twice before writing it off.”
FxPro: “Interesting reaction has been in the bond market”
Simon Smith, chief economist, said: “The interesting reaction has been in the bond market. We’ve seen yields higher in the core markets, so France and Germany, with yields falling in the periphery, such as Italy and Spain. The latter naturally have further to fall, so the bang for the buck is going to be greater. The ECB’s actions have to be welcomed given the current deflationary threat that the eurozone faces.”
“In summary, this is only the start. We are not going to see the text-book response sustained (i.e. lower yields, weaker currency) owing to the underlying complications of QE in a monetary union. We’re going in the right direction, but on a very bumpy road where accidents are more likely to happen.”
Russell Investments: “A really thick layer of icing on an already attractive cake”
Wouter Sturkenboom, investment strategist, said: “Today’s announcement from the ECB qualifies as a QE bazooka. The initial response from financial markets is largely in line with expectations with the euro falling and eurozone financial assets rallying. This is expected to continue for a while.”
“For the attractiveness of eurozone financial assets, this move is the equivalent of a really thick layer of icing on an already attractive cake. We expect it to have a positive impact on eurozone equities, credits and peripheral bonds, while lowering the euro exchange rate.”
JPMorgan Asset Management: “Optimistic for another positive year in Europe”
Stephen Macklow-Smith, portfolio manager of the JPMorgan European Investment Trust, said: “This is a boost for European equity markets and in particular will support higher-yielding stocks. European financials will be incentivised to redeploy their assets out of cash, where they are likely receiving negative deposit rates, and instead invest in the wider economy. For banks that means more and healthier lending activity. For insurance companies that may include buying corporate debt and even equity at the margins.”
“For the European economic outlook, headwinds from the last several years are turning into tailwinds. Growth is recovering, particularly amongst those countries that have already restructured. Bank lending is gradually improving now that the stress tests are a memory of last year. Low inflation for the moment means that real incomes are growing, and this should help to underpin consumer confidence. Lower energy prices and commodity prices mean lower input prices for most companies, and this should help corporate confidence. We are optimistic for another positive year in Europe.”
Charles Stanley: “Equities and perhaps property should prosper”
Rob Morgan, pension and investments analyst, commented: “There is an argument, borne out by recent results, that all QE really achieves is inflating asset prices and doesn’t really to help the real economy, except make those with investments feel wealthier.”
“Looking back at when the US introduced QE, and the effects on the market, is quite revealing. While the three phases of US QE were in operation, the S&P 500 rose substantially in each period. Interestingly, when the tap was turned off after the first and second phases the US market fell back. It didn’t after the third and final instalment, which finished in October 2014, but arguably the US economy was on a much sounder footing by that stage."
“If Europe follows the same pattern, then owning European assets could be a profitable way of taking advantage of money printing. Whether the threat of deflation in Europe has disappeared is impossible to say, but however if history is anything to go by, equities and perhaps property should prosper.”
Capital Economics: “Even sizeable amounts of QE are unlikely to transform the outlook”
Jonathan Loynes, chief European economist, said: “The first details of the ECB’s quantitative easing programme suggest that it has met, and possibly even exceeded, expectations. The central bank will buy €60bn of assets per month from March until September next year, pointing to total purchases of about €1.1trn. This is close to the amount suggested by reports yesterday, but double the figure being mooted only a couple of weeks ago.”
“Overall, the fact that peripheral bond yields have fallen in response to the announcement suggests that, initially at least, the size and open-endedness of the programme is trumping concerns about the lack of risk-sharing. But we would caution again that even sizeable amounts of QE are unlikely to transform the outlook for the eurozone economy and eliminate the risk of a prolonged and damaging bout of deflation.”
Hermes: “QE bazooka to quickly fix the problem will be disappointed”
Neil Williams, group chief economist, said: “Draghi is doing a good job of addressing the symptoms of the crisis - escalating funding costs and, more recently, deflation. Also, his avoidance today of ‘blanket’ risk-sharing and skewing the bond purchases according to members’ capital contributions to the ECB will appeal to those worried that fiscal discipline would be thrown out of the window.”
“But anyone expecting the QE bazooka to quickly fix the problem – a monetary union still devoid of sufficient economic union – will be disappointed. Within the eurozone, shifts in euro-members’ competitiveness are still far too disparate for that happen.”