Posts Tagged ‘QE’

The European Quantitative Easing (QE) has been announced and the market cheered has it is Euro 60bn per monthtill 2016 (just over E1 trillion) versus the expected 50-60.

Markets cheered at the surprise (the real reaction will be in a few days, after digestion).

So let’s focus on some details.

It starts in March 15, some details still to be unveiled.

The ECB, to make the Germans agree, had to put some conditions.

In theory the purchase will be shared 20% by the ECB and 80% by the national Central Banks. But also there is a conditions that limits the amount that the ECB can hold of a single nation. As the ECB helped already a lot the likes of Greece, Italy, Spain, Portugal….it means that the risk sharing for these countries will be 8% ECB – 92% Single Country. Practically if ECB buys 70 the National Central Bank buys 730!

This goes against the idea and pattern of European integration.

Greece comes even worst. As the various bailouts have already filled the ECB quota of Greek debt….no purchases of Greek debt until the first tranche of the bailout expires (conveniently in July/August, when the outcome of the elections will be very clear).

So we will need to see how Syriza (probable winner in Greek elections) will behave – but they are already toning down their requests. Similar situation for Cyprus.

The ECB can buy a maximum of 25% of single issuance (and 30% top of issuernot to distort the price- it looks like a nice clause, but it is actually the market distortion that helped the US Fed to do what it did. Plus it is not clear if there are enough bonds to buy at 25% of single issuances  which sums makes Euro 60 bn per month.

Take out:

– It is consistent with the “disintegration” (not economical, but political) of Europe in the long term

-it could be positive for the market (some more details in March)

-it probably will not effect the real economy  – to 2016 the real effect will be 0.2/0.8% on the GDP. So to bring the GDP growth to 2-3% you will need European QE2 and European QE3 like the Americans.

If you have the questions…..since they could see the US, why the ECB did not do immediately a QE1,2,3 of Eu3 trillions. They are not stupid – they simply cannot do it as the Germans say NEIN NEIN NEIN!! In reality Europe is in a worst position than US, so it should do like the Bank of Japan that is now compelled to buy everything – including shares.


Germany at the US is currently playing the great de-escalator of the conflict between Russia and Ukraine.

But the real battle is actually behind doors between Mario Draghi that want a European Quantitative Easing (idea on which the market has all hopes after the end of the US QE in order to keep on rallying) and the Euroskeptical Alternative that point (with success) at the illegality of such an action (view supported also by the Bundesbank. Also the challenge (to the ECB powers)  pursued in 2012 by the German Courts is now under review).

So a hard battle for Draghi and the markets

Finally the tapering has commenced and the market rallied!

Why first of all it is just USD 10bn a month …and what is more just 5bn of Treasuries (the other is mortgage securities), than they said they will anyway keep tapering/low interest until 2015 at least and the taper was already in (weakness since Nov). Plus there is consistent talks that they are studying how to effectively push banks to give to the economy the money (the free money given to the banks now are re-deposited by the FED) and they cannot risk to upset the bond market. As usual it would take some days (and the press release) for the market to digest the info.

The QE Bull market is dead, long live the Bull Market!

Some extract from the speech – transcript – I just bold the important bits.

“We have emphasized that these numbers are thresholds not triggers, meaning that crossing the threshold would not lead automatically to an increase in the federal funds rate but would indicate only that it was appropriate for the committee to consider whether the broader economic outlook justified such an increase. With many FOMC participants now projecting that the 6.5-percent unemployment threshold will be reached by the end of 2014, the committee decided to provide additional information about how it expects its policies to evolve after the threshold is crossed.”

If incoming information supports the committee’s expectation of further progress toward its objectives, the committee is likely to reduce the pace of monthly purchases in further measured steps in future meetings. However, the process will be deliberate and data-dependent. Asset purchases are not on a preset course.

“If we are making progress in terms of inflation and continued job gains….I imagine we will continue to do probably at each meeting a measured reductionThat would take us to late in the year, certainly not by the middle of the year. If the economy slows for some reason or we are disappointed in the outcomes, we could skip a meeting or two. On the other side, if things really pick up and, of course, we could go a bit faster, but my expectation is for similar moderate steps going forward throughout most of 2014.

“The recovery clearly remains far from complete with unemployment still elevated, with both underemployment and long-term unemployment still major concerns. We have also seen ongoing declines in the labor force participation, which likely reflects not only longer-term influences such as the aging of the population but also discouragement on the part of potential workers. Inflation has been running below the committee’s longer run objective of 2 percent. The committee recognizes that inflation persistently below its objective could pose risks to economic performance and is monitoring inflation developments carefully for evidence that inflation will move back towards its objective over time.”