The European Central Bank took larger than expected measures on Thursday, unveiling a program of large-scale government bond purchases which will pump hundreds of billions in new money into the region’s sagging economy.
The ECB said it would purchase sovereign debt from this March until the end of September 2016, despite business leaders in Europe gave a mixed welcome to the expanded asset purchase program. Germany’s Bundesbank and concerns in Berlin reiterated their opposition to the QE decision with the strongest dissents amid speculation it could allow spendthrift countries to slacken economic reforms.
“This is a step in the right direction and we’ll have to watch and see how it plays out,” Swiss drugmaker Novartis AG Chief Executive Joe Jimenez told Reuters.
“This is one additional step that could help Europe now come out of slow growth to something more like what has happened in the U.S. It worked in the U.S. and I think it can work here.”
“One could argue that this type of approach Draghi is using should have been applied much earlier, which would have gotten Europe on a similar kind of platform the U.S. was on,” Stephen Schwarzman, chairman of the Blackstone Group LP, said in a Bloomberg Television interview at the World Economic Forum in Davos. “It is never too late to do the right thing.”
ECB President Mario Draghi promised to release 60 billion euros worth of assets per month into the economy, more than markets had been hoping for, in a program that will last through September next year and will include government bonds, debt securities issued by European institutions and private-sector bonds. The ECB’s €1.1tn QE programme is considered the last remaining major policy option for stimulating eurozone economy and counter the threat of a deflationary spiral.
The ECB “decided to launch an expanded asset-program encompassing the existing purchase programs of ABS and covered bonds,” Draghi told reporters in Frankfurt. “We see sustained adjustment in the path of inflation which is consistent with our aim of achieving our aim of inflation rates close to but below 2 percent.”
The flood of money is a big hit with investors: the euro hit a fresh 11-year low against the greenback and European markets marked seven-year highs.
“All eyes were on Mario Draghi and he has delivered a bigger bazooka than investors were expecting,” said Mauro Vittorangeli, a fixed income specialist at Allianz Global Investors, adding that the news marked “an historic crossroads for European markets”.
Central banks in the eurozone and the ECB will buy sovereign debt on the basis of the capital key, meaning the biggest economies such as Germany will scoop up more debt as compared to small member states such as Ireland.
The outlook of ECB stimulus plan had already prompted the Swiss central bank to abandon its three-year-old cap on the franc versus the euro. Denmark annoynced second interest rate cut this week on Thursday after the ECB announcement, pushing the country’s main policy rates further into negative territory amid hope to defend the Danish crown’s peg to the euro.
Impact on U.S.
Investors may have to rethink about the timing of an interest rate increase by the Fed following the ECB’s landmark sovereign bond-buy plan, Janney Montgomery Scott’s chief investment strategist told CNBC on Thursday.
“I think there’s a nontrivial chance that this helps to delay the Federal Reserve’s liftoff date with regards to interest rates if the dollar continues to strengthen,” Mark Luschini said in a “Squawk on the Street” interview.
Luschini was a little bit cautious when saying that exports represent nearly 15 percent of U.S. GDP, of which about 15 percent are sent to Europe. That suggests the euro-dollar cross has little impacy on America’s economy, he said.
However, if the Europe’s bond-buying helps lift the dollar, American multinationals are going to suffer problems, U.S. bond yields could move down and inflation is expected to be tempered, he said. As dollar stregthens it increase the price of U.S. products abroad.
The ECB program may give a boost to U.S. equities, Luschini said, though he noted they also have the ability to grow on their own merit.
“At the end of the day, if [ECB bond-buying] helps to inflate risk assets in Europe and help the European economy—although I think the economic efficacy of it is a bit in doubt—I think ultimately that will pull forward U.S. equities as well,” he said.
He added that European equities are trading at discount on a valuation basis, and Janney Montgomery Scott believes they are likely to outperform U.S. equities in 2015.
“Any measure which can contribute to reignite inflation…is positive for Remy Cointreau,” a spokeswoman for the French spirits group said.
“The dollar appreciation against the euro is also a good lever for the group’s profitability because over 60 percent of the group’s sales are in US dollars or currencies linked to the dollar, while most production costs are in euros.”
Rupert Stadler, who is chairman of carmaker Audi, was happy to see the fall in the euro on hopes German exports will be made more aggressive and major investments in the United States cheaper.
“There is a big opportunity for us to grow in the United States and, with the euro dollar exchange rate at the moment, it is a little bit easier,” he told CNBC television in Davos.
It’s not just the ECB that’s flooding the world with money that will inevitably end up in dollar-based assets.
“If the Fed starts hiking in this turbulent global environment, it will only accelerate overseas investment here — further damp already muted inflationary pressure and making life difficult for exporters, and possibly furthering risky behavior that some on the Fed want to clamp.”
On the contrary, some market observers think ECB’s QE won’t prompt the Federal Reserve to back off plans to raise interest rates in 2015.
“I do not think it will,” says Nick Colas, chief market strategist at Convergex, a New York-based brokerage. “They are trying to march to the beat of a different drummer. For them it is about getting monetary policy back to normal.”
MarketWatch commentator Rex Nutting wrote (read full story) that “If the dollar is strong because the economy is strong, there’s little reason for the Fed to be overly concerned.”
Sean Powers, chief investment officer at Cain Brothers Asset Management, said “I don’t think the ECB decision will have an effect on the Fed. The US is further down the road of recovery and arguably in a better financial position than Europe. Perhaps the ECB move alleviates the pressure on the US to remain a strong economic island relative to the rest of the world. If that is the case the probability of the Fed raising rates sometime in 2015 goes up.”