The launch of eurozone “quantitative easing” less than four weeks ago was a remarkable moment in financial history. Not only did the European Central Bank finally shed its conservative image and defy Germany’s powerful Bundesbank.
Unlike with earlier US Federal Reserve QE, its €60bn a month programme of public and private asset purchases started when stock markets were testing record highs and it seemed interest rates could fall no further.
For market watchers — and nervous bystanders — here is a guide to what we have learnt so far and what might happen next.
One lesson is that Mario Draghi, ECB president, is either lucky or great at timing. As bond buying started the eurozone economy flickered back into life. Eurozone economic confidence has jumped to a near-four year high; the main eurozone purchasing managers’ index — a gauge of economic activity — has risen for four consecutive months.
Economists debate exactly how QE stimulates economies. Perhaps one way is via a “confidence channel” — if enough people believe QE works it works. So far, Mr Draghi has managed to pull off that trick; eurozone share prices are up 16 per cent this year — a decent QE “pop” by Fed standards. “The magic has worked in a way,” says Vincent Juvyns, strategist at JPMorgan Asset Management.
Helping Draghi has been the euro’s steep fall against the dollar — the result of diverging eurozone and US monetary policies. Again, Draghi got his timing right. In spite of an appreciating currency, the Fed should still increase interest rates later this year, possibly in June. Meanwhile, with a stronger currency crimping US companies’ earnings, Europe looks attractive to US investors — hence the rush into eurozone equities.
But the experience of eurozone QE has not been smooth for the rest of continental Europe. Switzerland’s economy was jolted by a steep jump in the Swiss franc after the country’s central bank gave up trying to cap its value against the euro. Sweden and Denmark have had to slash interest rates deep into negative territory to prevent negative side effects.
Meanwhile, transatlantic policy divergence has complicated life for strategists trying to predict where yields head next. “It’s like the end of the cold war when you moved from a bipolar to a multipolar world, with central banks tugging in different directions,” says Richard McGuire, bond strategist at Rabobank.
Before the ECB started buying on March 9, many expected bond prices would fall and push up yields, which move inversely. The argument was the ECB’s intentions were well known and that smart investors “buy the rumour, sell the fact”. In fact, another lesson of eurozone QE is that yields could fall further.
The biggest declines have been in German bond yields. That was perhaps not surprising: Berlin’s fiscal conservatism is expected to create shortages of German debt for the ECB to buy.
© Financial Times
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