The ECB said the combined monthly purchases which includes ABS and covered bonds and now include sovereign and agency bonds will total 60b euros per month and will continue to do so “until we see sustained inflation improvement.” The ratio will be based on the capital key where about half is made up of Germany, France, Italy and Spain. The ECB will coordinate the purchases but will be implemented decentrally which means at the national level. European institution paper (such as EFSF paper will be subject to loss sharing but national central bank purchases of other sovereign debt will not be subject to loss sharing which appeases the Germans). They also lowered the rate at which the TLTRO will be lent at to .05% from .15%.
Bottom line, as I doubt even the ECB believes that this news will directly increase bank lending, it is likely all about further weakening the euro. In trying to gauge what has been priced into markets, the euro is the main thing we should be watching which is down slightly after being up slightly. Second to that is the European sovereign bond market where the action in German and French bonds (making up 1/3 of the capital key) seems to have priced the news in as the 10 yr yields in both are little changed. On the flip side, the bonds of Italy and Spain are higher with yields lower. The action in stocks are just pavlovian to any form of central bank accommodation and today is no different. The transmission though of these newly printed euros into actual stock purchases is specious and thus buying stocks on ECB QE news is more superstition than based on substance in the US. European multinationals will at least benefit from a lower euro. Lastly, I’ll repeat again that we are today witnessing the final climax in the more than 6 years of historic central bank action and thus asset prices are extremely vulnerable, particularly the riskiest kind, stocks if the underlying economic and earnings fundamentals don’t support current multiples which I believe they don’t.
One last point on today’s news from the ECB. As I stated the other day, Draghi had a goal of getting the ECB balance sheet back to the level of around 3T that it was at in early 2012. He thus reiterated that goal in his press conference and the further initiatives announced today will help him get there with a total of about 1-1.1T of purchases of sovereign, agency, ABS and covered bonds. Thus, today’s news came because the previous initiatives weren’t going to get them there on their own and thus more assets needed to be purchased. Therefore, the only thing that really changed today was the composition of assets that will get to the ECB’s goal stated last year of a 3T euro balance sheet. Since my last email, the euro has weakened to below 1.15 and European bonds are now rallying across the board even though there doesn’t seem to be that much new information that we are getting that’s different from what’s been highly speculated.
Draghi is also saying that the ECB will buy bonds with a negative yield. I’m sure the Germans loved that idea I say sarcastically.
Peter Boockvar, Chief Market Analyst
The Lindsey Group LLC