Time to reach for the bazooka yet

This coming Thursday the European Central Bank will provide its latest monetary update and it is not likely to be pretty.

Time to reach for the bazooka yet


Following on from news that Germany’s economy entered into a slight retraction of 0.2% last quarter and France’s continued to flatline, it is likely the ECB will confirm that close to zero inflation has occurred across the eurozone.

Bank of America Merrill Lynch expects the lowest inflation numbers since November 2009 to be reported at 0.3% year on year.

BAML said indicators remain ‘at dangerous levels’ and the evolution of market-based inflation expectations is worrying.

It cannot be completely ruled out that the figure could even dip into the dreaded minus number which would mean deflation has taken hold, although that is generally regarded as unlikely this time around at least.

The question this begs for investors is will Mario Draghi and his ECB colleagues feel that 0.3% inflation (or possibly even less) buys them a little more time, or will they act before the point at which they absolutely have to.

There is no direct precedent for a eurozone quantative easing programme because the individual member countries all issue their own debt, unlike the single government issuer situation in the United Kingdom and United States.

However, if a single currency across all the individual countries can be designed and rolled out then it is hard to argue that the practicalities of designing a QE programme for the bloc could not be managed successfully.

Investors who correctly anticipate the timing of a move to a European form of all-out QE could be well placed to profit.

It is generally agreed that the QE programmes conducted in the  UK and US put significant upward pressure on equities, contributing to the rapid bounce back from the lows of the financial crisis.

Many European companies could see decent gains in share price if a QE programme is announced or becomes regarded as imminent.

Should the ECB leave it too late however, even a temporary bump to stock prices may be elusive if the market regards the move as too little too late.

The earliest feasible time for the ECB to step up monetary stimulus measures would be the September meeting. BAML said that ‘may be too early’ but if risks persist and some materialise as expected it said the ECB 'will have to act again soon'. 

One thing for sure is that whatever policies the ECB chooses to pursue, not all members of the eurozone will be happy with the decisions.