ECB decision and market comments

ECB decision: 60 bn € of asset purchase on a monthly basis, starting in March and for as long as the inflation trajectory of the Eurozone is not sustainable. This was partly priced. The expansion of ECB’s balance sheet is ON, so this will certainly have some impact on markets.

Key items of ECB policy action:

Draghi’s Speech

Asset purchase program

Here are a couple of first market reactions and commentaries.

Ricardo Garcia-Schildknecht (UBS-economist):

« Consensus expected the balance sheet to expand by EUR 1 trillion to EUR 3 trillion by the end of 2016. As such, the purchase volume target of EUR 1.1trn and the intent to do more if needed is positive and above consensus expectations as it permits the Eurosystem’s balance sheet to expand to somewhat more than EUR 3 trillion at a faster pace.

The fact that the risk is mostly allocated to national central banks should not derail the QE program’s effectiveness.

The new QE program is large enough to bring about an easing of financial conditions and to create significant wealth effects. Due to the lag in monetary policy, the bulk of the economic impact is only expected from 2016. Yet, past ECB measures, coupled with the falls in the euro and oil prices, should generate a strong growth impulse during 2015. »

Roland Kaloyan, Kevin Redureau (SocGen-equity strategy team):

« The ECB has just announced how it will significantly increase its balance sheet in the coming months. We expect this major shift in monetary policy to be a strong support for Eurozone equities as two fresh drivers should kick in: 1) a return to a normalised
correlation matrix (see chart below); 2) PMIs bottoming out soon and accelerating later in
the year, which should boost corporate earnings. »

A 10% drop of euro should boost European earnings by 7%, with the French market most impacted (+9%), according to SG. Stocks that might benefit: Credit Agricole, Intesa Sanpaolo, Nokia, Renault and Enel.

Guy Stear, Juan Esteban Valencia (SocGen-fixed income/credit)

« The ECB is set to buy bonds to the tune of €60bn a month until September next year (or more if needed). There was no mention of corporate debt in today’s meeting (…). Government bonds, both core and peripheral, had been losing ground ahead of the meeting and the initial reaction was a sharp reversal with peripheral bond yields hitting record lows again. Bunds and OATs were also gaining ground with the latter setting new record low yields. Today’s price action may see a rebound in the coming days but clearly, with the new injections, it is difficult to see yields of bunds (or other government bonds) rising substantially from current levels.

The implications for credit spreads remain positive. The ECB may not buy credit outright but the €60bn in monthly injections should see their way into other asset classes and some funds are very likely to be channelled into the credit markets. After all, whoever sells to the ECB will have €60bn to invest. This may mean that investors are pushed into riskier assets and the hunt for yield will intensify. And this means more high and low beta spread and yield compression. In that sense we feel comfortable with our views and continue to prefer the triple-B/double-B space, the corporate hybrids, AT1 Cocos and other high beta names and bonds. »

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