Along with a 10bps cut in both the refinance rate, the ECB cut its deposit rate to minus 0.1%. It also announced a series of targeted longer term refinancing operations, aimed at increasing bank lending across the region and said it would: “intensify preparatory work related to outright purchases in the asset backed securities market”.
According to Steven Bell, chief economist at F&C Investments, while none of the measures in and of themselves were surprising: “the fact that they did everything has led to a significant positive reaction in the equity markets.”
The Euro Stoxx 50 rose 0.90% on the day, the CAC 40ended the day just over 1% higher, as did the IBEX 35. The DAX ended the day up 0.2%, but briefly topped 10,000 for the first time after the announcement.
Nick Gartside, manager of the JP Morgan Strategic Bond Fund, agreed that it was a “pretty powerful” announcement.
“The market had quite a long shopping list and that it could tick most of it off, was pretty impressive.”
But, he points out, markets will not be able to make a judgement on whether or not this has worked for some time.
Russell Silberston, head of reserve management at Investec Asset Management, agrees that the impacts of the announcement will take some time to filter through into the markets but told Portfolio Adviser, there was little other option.
“Mario Draghi acknowledged that there would be delayed impact and it is inevitable that it will take some time to flow through, but there is nothing else they could do, the other option is a Japan-style deflation.”
He added: “The ECB is fighting a battle on two fronts, they are trying to stop damaging falls in inflation expectations and they are trying to get the banking system working again.”
How best to play it
According to Gartside, it will definitely be good for risk assets and it is likely that peripheral bond markets will continue to outperform. He is also of the view that European high yield funds are likely to do well.
For Silbertson, the highest conviction call he has is the prospects for high-quality, inflation-linked European government bonds.
“If these measures trigger a multi-sector recovery, it will be good for cyclical assets. Ultimately you would expect both equities and inflation-linked bonds to well. If it doesn’t work they have no other option but to find other measures to boost inflation,” he added.
Scott Thiel, deputy CIO for fundamental fixed income at BlackRock, is a little more cautious.
“While we remain positive overall on the European periphery, we are cautious in the current environment and our positions in the region are now at their lowest levels in over two years. We are cognisant not only of the recent spread compression for peripheral European government bonds but also the switch in market focus from fundamentals to the potential for QE in the eurozone.”
He added: “In general, we are cautious towards the current global bond market environment. We see the potential for volatility and liquidity issues to arise once markets begin to focus on the large imbalances that have occurred from rates being so low for such a very long time, particularly by the Fed and the Bank of England.”
Stewart Cowley, investment director of fixed income and macro at Old Mutual Global Investors, was less convinced, however.
“It is doubtful much of this will work or have a major effect on Europe. The banking system is awash with money. The system is shrinking and therefore the ECB was bound to step in with a support program to prop it up. But to get money supply growing again (and inflation rising) you need both the willingness to the lend and the desire to borrow. Neither of these things are present. The ECB will have to act again going forwards just to hold the whole thing up. Otherwise it could blow the euro apart if we have another round of problems in europe. In that sense the E400bn injection announced today is both too small and not the end of the intervention.”
