Podcast 11th March 2016
ECB unleashed a Fed like monetary accommodation in its policy meet on the 10th of March 2016. The Central Bank cut policy rates to zero percent, cut discount rates from negative 0.30% to negative 0.40%, increased its monthly bond purchase size from Euro 60 billion to Euro 80 billion and widened the scope of securities that it can buy to include corporate bonds.
The Fed post the 2008 global financial crisis had reduced interest rates to zero percent and had pumped in around USD 3 trillion of liquidity through QE over the 2008 to 2014 period. The result was a sharp rise in US equity indices that touched record highs in 2015. The US economy too had a positive impact from the QE with unemployment rate coming off from 10.5% to 4.9%.
The ECB QE is big enough to have a positive impact on global equity markets. The fact that safe haven assets such as sovereign bonds are yielding close to nothing with yields in negative territory in the Eurozone and Japan and have come off in the US, there will be fatigue in the market on earning nothing on investments. Outlook for commodities is still weak with China not showing any signs of wanting to grow at the pace it was growing earlier. China’s government has settled for a growth of around 6.5% to 7% and focus on strengthening the economy structurally.
Given this cheap liquidity pumped in by central banks, the search for returns will resume once the period of market volatility and consolidation is over. The year 2016 has seen global equities falling on worries of China, global economic growth and fall in commodity prices. The fear has still not gone out of the market and that led to fall in European equities post ECB announcement.
Equities will be the beneficiaries of ECB policy accommodation given that the markets will start to factor in growth for the Eurozone at some point of time in the future. The Eurozone has seen some improvement in macros with Unemployment rate coming off from around 12% to 10.3% over the last couple of years. The economy has come out of recession though growth is still anaemic at around 0.3% levels. Given that US economic growth is reasonably stable and Eurozone aiming to grow at faster pace, global economic growth outlook too would improve.
High yielding currencies and bonds too would benefit from ECB liquidity as money starts to chase higher returns. On growth outlook stabilizing albeit at lower levels, markets will start to move from low yielding assets to higher yielding assets and that would drive down credit spreads.
Patient investors who are willing to ride out near term volatility can benefit from ECB policy.
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