QE Train Arrives at Eurozone—Finally

25 Jan 2015 | Author: | No comments yet »

All eyes on Fed, Greece soon after ECB fires bazooka.

PARIS (Reuters) – After the surprises from central banks which rocked markets at the start of the year, the U.S. The eurozone’s long-running guessing game ended this week when the European Central Bank (ECB) finally announced a €1 trillion asset-purchase program that it hopes will kick-start inflation and spur economic activity in the growth-starved region.After a series of major announcements by central banks across the globe, a central question for investors has emerged: Do monetary policymakers have less ability to pull out easing as the instrument of last resort?

David Zahn, head of European Fixed Income, Franklin Templeton Fixed Income Group®, says the ECB’s plan was worth the wait and offers his analysis of what to expect in its aftermath. While investors muse over the limitations of monetary policy, national elections in Greece are expected to result in a government bent on renegotiating terms with the European Union.

Expectations are for the US central bank to stick to its guns in spite of the turmoil elsewhere, with prime Fed officials citing in the past weeks robust US economic momentum and falling unemployment. Monday, January 26: December trade data for Japan will be announced, with consensus forecasts among economists predicting a rebound in both imports and exports. I think the plan should have a modest impact on the ECB’s goals of weakening the euro exchange rate and making it easier for businesses and consumers to borrow money, which, in turn, may stimulate growth.

But questions have been raised due to weak wage growth and five-year low oil costs that have dragged US consumer rates down to their largest drop in six years in December and heightened deflation fears in Europe. “What we will focus on in January’s statement, which could challenge our view about a June lift-off, are any hints of elevated concern that really low headline inflation is putting downward pressure on inflation expectations,” analysts at BNP Paribas wrote in a note. “Any mention of foreign developments would also be dovish.” In any case, San Francisco Federal Reserve Bank President John Williams mentioned a day immediately after the Swiss central bank stunned markets, and even some policymakers, by lifting the cap on its currency against the euro that the Fed’s goal was “to not surprise or disrupt markets.” Central bank policy meetings in countries like Russia, South Africa, Israel, Sweden and Turkey will also try to tackle tumbling oil rates and the aftermath of the ECB’s quantitative easing strategy, which sent the euro to an eleven-year low. The plan also should provide an accommodative backdrop for countries that are implementing necessary structural reforms, which are critical to the long-term recovery of the eurozone, in my opinion.

Obtaining been relied upon throughout the economic crisis to use their firepower to insulate the system from big shocks, central banks will also be poised to deal the outcome of the Greek common election. In Europe, German IFO sentiment data, collected from business leaders, will be released with expectations for sentiment to improve in anticipation of ECB easing.

Despite the fact that about 90 per cent of Greek debt is now held by official creditors, largely limiting the achievable contagion from any fresh instability there, the country whose debt crisis after threatened the euro’s survival nonetheless carries dangers. “We believe in the efficacy of QE,” JP Morgan analyst David Mackie mentioned. “But, for now, we are not lifting our (euro location) GDP forecast in the face of prospective new headwinds from political uncertainty in Greece and the considerably deeper recession in Russia.” Just after borrowing prices for Eurozone nations fell to record lows on Friday, information throughout the week will give extra news on the sluggish well being of the currency location and the challenge facing the ECB’s QE strategy. It will be up to the individual national central banks to purchase the remaining 80%, and those countries will be responsible for the risks involved with holding those assets.

November Case-Shiller data for major markets and monthly new home sales estimates from the Census Bureau will help bring real estate prices into focus. Apple’s fourth-quarter earnings announcement stands to be a primary narrative for equity markets, with expectations riding high on the back of sales for the iPhone 6.

They have far more than halved since June but the Brent closed up on Friday at $48.79 a barrel, with the death of Saudi Arabia’s King Abdullah adding to uncertainty over the plans of the world’s most significant crude exporter. While a trillion euros represents a very good-sized program—better than many people expected—in my view it is quite a modest plan in comparison to what the United States or the United Kingdom has done. On a day full of earnings releases, the Wynn Resorts announcement stands out, as a crackdown on high rollers in Macau leaves gaming investors worried about the sector’s fastest-growth market.

Thursday, January 29: December retail sales for Japan and external trade prices for Australia will be the primary economic releases in the Asia-Pacific region. Private-sector lending data for December as estimated by the ECB stands to provide insight into how much of the liquidity provided to markets by the euro zone’s central bank is actually passing into the hands of commercial borrowers.

I think there will likely be a moving out on the risk spectrum as the ECB buys government bonds, and investors then have to find something else to own to get yield. Among the many earnings releases on Thursday the NASDAQ OMX Group announcement will be of note as a bellwether of increased volatility and volume during the final quarter of 2014. Additionally, with the launch of the QE plan, the ECB has just reemphasized that it’s there to inject as much liquidity into the market as possible. I think that means European bonds are potentially positioned to perform well—especially relative to other bond markets in the world—because the ECB is very much on a heavy easing cycle, compared with other countries where there is talk that rates eventually will rise (namely the United States). December employment and consumer spending figures, as well as final industrial production and critical vehicle manufacturing data, will also provide more insight into the health of the Japanese economy in the final month of last year.

A few final words about exchange rates during the buildup to the ECB’s announcement, namely the Swiss National Bank’s (SNB) abandonment of its currency cap on the Swiss franc versus the euro. However, I do think this preemptive move has cost SNB some credibility, because bank officials said just recently that the currency cap was one of the key pillars of their system. David Zahn’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy.

Currency rates may fluctuate significantly over short periods of time, and can reduce returns Beyond Bulls & Bears – Perspective from Franklin Templeton Investments (U.S.) – At Beyond Bulls & Bears, our mission is not to bring you the latest hot stock tip or bit of Wall Street gossip. It’s to share the on-the-ground, long-term perspectives of investment professionals adept at navigating the increasingly complex world of global investing.

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