Amazingly, we are in our 7th year of central banking assistance to financial markets but there is apparently still a need for an additional €1.2 trillion ECB balance sheet explosion . Here are 5 early WealthiFi observations…
1. €60 billion a month for 18 months is a significant print of new money. New funds will enter the financial system and will find a home. Financial assets and bank balance sheets will benefit; main street citizens of the EU, less so, if history is a guide.
2. The euro/USD exchange rate has fallen to a 114 handle since Draghi spoke; expect that weakness to continue. Nice for EU exports. Less so for US multi-nationals; ask Johnson&Johnson.
3. Critically ECB buying targets will mirror individual sovereigns’ capital commitment to the ECB. So the nation that least needs it, Germany, will be receiving most assist!
4. Lower funding costs(see Bunds), lower energy costs, ECB financing and a massive export component within national GDP suggest Germany as the natural beneficiary of QE. Not unlike previous QE programmes in the US, it would appear those with wealth tend to do better out of QE than those with no wealth.
5. Early indications/analysis of equities market reaction in Europe would suggest we treat QE as an expected(but not delivered?) “cycle” boost. On that basis, you will note financials, early cyclicals, beaten up names, construction, possibly materials/mining names and global media USD earners(see WPP and Publicis) rising with growth hopes.
None of the above are long-term pronouncements. Frankly, the Fed may be easing off the pedal but it’s never great to see the BOJ and ECB doubling down(yes!!) on the previous US effort to keep deflationary wolves from the door. Some day the central banks will recognise their mistaken assumption and force governments to admit that boosting private banking balance sheets does not generate demand for credit in the absence of structural reform/economic incentive.
View all posts by Gary →