ECB re-examines its quantitative easing policy
Published 03-DEC-2015 09:46 A.M.
4 minute read
Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.
In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.
The below articles were written under our previous business model. We have kept these articles online here for your reference.
Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.
Click Here to View Latest Articles
With the European Central Bank meeting just hours away, James Stanley, Currency Analyst at DailyFX, comments on the ECB meeting and its potential impact.
The European Central Bank will meet for December after warning markets that the bank would re-examine their QE policy.
“This was largely inferred to mean that the ECB was going to step up their stimulus program to offset persistent deflationary pressure that still persists despite being over a year deep into their current program,” says Stanley.
“The Euro has been seeing massive selling across markets over the past six weeks, and we’re seeing an extension of that selling this morning just 24-hours ahead of tomorrow’s ECB meeting.”
Stanley said the ECB’s current program purchases €60 Billion of bonds per month. Most analysts expect this to increase.
“That doesn’t really even seem to be up for debate at this point. But increasing QE isn’t as easy as simply typing in a larger number on the calculator every month, as the ECB has set a framework which they must operate within in an attempt to avoid losing money on Quantitative Easing, which was an important point, politically speaking, to get support from Northern European states to enable QE in the first place.”
Here’s what Mario Draghi had so say about the coming meeting in a letter to the European Parliament.
The ECB only buy bonds that have higher yields than what they are paying to commercial banks that are depositors. The current deposit rate is -.2%. According to Stanley this means that anything yielding less than -.2% would not be applicable under the ECB’s QE program.
“So, those really attractive 2-year German Bunds that everybody in the world wants wouldn’t apply under the current form of the program because the yield on that paper is currently at -.434%. And it’s not just 2-year German Bunds sporting a negative yield of less than -.2%, as some estimates peg approximately 10-12% of the €5 Trillion trove of potential of bonds as carrying a sub -.2 yield.
“So, it may make sense for the European Central Bank to cut their deposit rate to further open up the possibilities of bond purchases without having to carry too much risk in the ECB portfolio (like being forced to stuff the portfolio with Spanish, Italian or Portuguese debt merely because it’s some of the only debt that applies). This would increase the negative rate that the ECB is paid from commercial banks, and this would open up considerably more bonds to be applicable to this QE program while also further encouraging commercial banks to lend (by charging them more money with even more negative rates). But that impact would likely be short-lived, as the ECB ratcheting the deposit rate lower would likely see the secondary market continue to bid up that debt (bid up = higher prices = lower yields for bonds) to the point where yields decreased even further, which would essentially nullify the impact to QE of a lower deposit rate within a few months.”
Cutting the deposit rate is no guaranteed panacea. The ECB may attempt to restructure their QE program by relaxing some of the rules instituted in July of 2014. Another possibility is to cut the deposit rate floor altogether.
“The Federal Reserve didn’t have a deposit rate floor during their multiple QE programs, and by setting the rate floor previously as the maximum yield that the bank would purchase bonds in the open market at, all that the ECB did was telegraph to the market where resistance would come in,” Stanley says.
“If the largest Central Bank in the world tells you that they’re buyers until yield hits -.2% (with the implication that they will continue to hold the position) – that is like the best support that an investor can get. If yields are .4% at the time, and the ECB announces that they’re buyers until yields move to -.2%, that means that buyers can, essentially, take a free ride on the ECB by front-running their expected future bond purchases.”
Stanley says scrapping this altogether may make sense. However, going down this path could raise the ire of certain countries within the Euro-bloc as the threat of QE becoming a costly endeavour could increase with the bank taking on all of that negative yield.
“The ironic part of all of this is that the economies that do not need capital flows (like Germany with already negative yields), are the ones that will get the most. And the countries that do need capital (Spain, Italy, etc) won’t get as much.
“So this may bring on another structural change to European QE in the form of shifting bond purchases away from Germany, or by the removal of the rule that mandates that the bank cannot purchase more than 1/3rd of any individual bond issue. These changes likely would face political pressure from a number of European member-states.”
General Information Only
S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.
Conflicts of Interest Notice
S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.
Publication Notice and Disclaimer
The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.
Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.
This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.