Eyes on Fed after ECB, other bank stimulus moves

26 Jan 2015 | Author: | No comments yet »

Draghi’s QE is an imperfect compromise for the eurozone.

The European Central Bank has decided to implement a new quantitative easing program, which includes a plan for the ECB and central banks of euro economies to buy a sizable amount of bonds.FRANKFURT—European Central Bank President Mario Draghi has called for deeper economic integration of the eurozone through joint policy in the areas of competition, bureaucracy reduction and labor markets after the ECB announced a large-scale bond-buying program. “There are good arguments for joint sovereignty in these areas—in the framework of a real economic union,” Mr.Speaking at the World Economic Forum in Davos, Benoit Coeure, a member of the executive board of the ECB, said the bank could not create lasting growth as that was down to governments. “We can make it cheaper to invest, but people have to want to invest and that is the role of finance ministers, that is the role of government,” Mr Coeure said.

Draghi said the asset purchases “are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation”. The flood of European money will flow across the channel into stock markets in the UK as well and there are plenty of shares in UK-listed companies that are looking cheap. Under the program, they will buy government bonds of the 19 countries that use the euro – a total of 60 billion euros (about 8 trillion yen) a month — starting in March. Mr Coeure said the ECB would be making that point at the Eurogroup meeting on Monday when the ECB holds talks with finance ministers from the eurozone. “With low growth, entrenched unemployment – people being dragged out of the labour market – we are seeing the whole political foundation of the European project being weakened.

And if the programme was going to be sustained until it raised the inflation rate to the ECB’s target of close to 2 percent, why mention a date at all? If you expected less, then either you did not believe that the ECB president meant it when he promised at the end of last year to increase the ECB’s balance sheet by about €1tn, or you counted wrong. His proposal follows the ECB’s decision Thursday to buy more than €1 trillion ($1.16 trillion) of assets including government bonds using newly created money to boost inflation on the Continent that has been struggling for years with a debt crisis. In other words, they would be held on the balance sheets of national central banks – German government debt at the Bundesbank, Greek government debt at the Greek central bank, and so on.

On the face of it, this arrangement – which Germany has reportedly insisted upon – is simply inconsistent with the idea of a single European currency run by a single central bank. But consumer prices in the euro area in December turned negative for the first time in about five years, driving the eurozone countries to the brink of deflation.

Draghi wrote, according to excerpts of his article published Saturday by WirtschaftsWoche. “For that, we need structural reforms which foster competition, reduce bureaucracy and improve the flexibility of labor markets,” he wrote. The ECB’s planned 1.1 trillion euro (US$1.2 trillion) stimulus has been one of the main talking points at Davos and has helped counter some of the pessimism that has enveloped the global economy in the past few weeks.

He said the governing council had agreed unanimously that the policy he was announcing was indeed monetary policy, not fiscal policy – that is, well within the purview of a central bank, not a national government. Draghi. “By obliging governments to do structural reforms, the economic union makes it credible that countries can indeed overcome their indebtedness through growth,” and therefore gain investors’ trust, Mr. Inflation expectations, according to a standard measure, inched up a bit after Draghi had spoken; the euro fell and so did bond yields, all as intended.

He said governments across the region have to enact a raft of structural reforms to their economies, such as making their labor markets more flexible and encouraging businesses to invest. The lending rates among major European countries have already been hovering at record-low levels, with little room left for interest rates to decline further. Meanwhile, those southern European countries that have made only limited progress in streamlining their industries and lack economic vitality should not waste any time in implementing structural reforms, including deregulatory measures. Countries such as Italy, with its cash-strapped public finances, support the quantitative easing measure, while Germany is opposed, saying that the purchase of sovereign debts may result in the central banks making up for fiscal deficits.

The decline of the big weekly shop and the rise of convenience stores and discounters has shifted shopping habits to more regular visits in smaller amounts. However, Carney said that the current low interest rates around the world and the stimulus programs in Europe and Japan could prompt “excessive risk-taking.” He said a better international supervisory framework means the world economy is more able to deal with that than it was before the global financial crisis in 2008.

What about the neither-here-nor-there scenario where inflation goes up by a few decimal points (in line with the market expectations implicit in the pricing of various financial assets)? In a separate development that could boost global growth, 21 WTO members — including Brazil, China, the EU, Japan, Russia and the US — backed efforts to conclude the so-called Doha Round negotiations, according to Swiss Federal Department of Economic Affairs Education and Research head Johann Schneider-Ammann. Johann Schneider-Ammann, who chaired Saturday’s meeting on the sidelines of the forum, said the trade ministers made a commitment to complete the round, mainly in the unresolved areas of agriculture, industrial products and services. That deal, aimed at lowering the time and costs for goods to cross borders, was the first multilateral trade agreement in the organization’s 20-year history — but it was still just a small part of the overall Doha Round. “There was a lot of finger pointing and a lot of accusations,” WTO Director-General Roberto Azevedo told a news conference. “We decided we had to change the conversation… They will take some pain from the slump in the value of the Euro as profits overseas a translated back into pounds for reporting purposes, but the earnings forecasts have already taken most of this into account.

The UK-listed packaging companies exposed to this trend are DS Smith trading on 13.2 times earnings and offering a 3.5pc prospective dividend, Mondi trading on 12.6 times earnings and offering a 3pc prospective dividend and plastics specialist British Polythene Industries trading on 9 times earnings and paying a 2.7pc dividend. Shares in the hotels group InterContinental Hotels have also increased more than 5pc since the QE announcement and currently trade on 22 times forecast earnings and offer a 2.1pc dividend yield.

The German media and the banking lobby portray QE as an assault on the German saver for the benefit of scheming Anglo-Saxon speculators, because it will probably lower interest rates further. Another point is that Germany’s retirement system — where pensions are not invested in the stock market, but in low-yielding government bonds — is not equipped for an environment in which interest rates are at zero for long periods.

On the more industrial front there is Brammer which supplies factories and heavy machinery across Europe with replacement ball bearings and gear boxes. The prices of commodities such as oil, iron ore and copper usually rise strongly on the back of quantitative easing, which mean shares in miners are a good bet. UK-listed mining companies such as Rio Tinto, BHP Billiton, Glencore and Anglo American have not benefited at all from the announcement of the €1.1 trillion asset buying scheme. By protecting itself from losses in this way, the ECB has in effect officially recognised the existence of a non-trivial possibility of European sovereign default.

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