So the ECB done what many wanted it to do and embarked on a
60 Billion Euro a month QE program till 2016. They have pulled out all the
stops and now it’s all or nothing for the ECB, apart from continually cutting
rates there’s not much more effective tools in the arsenal left for the ECB.
It is a matter of time to see whether this program works,
but one thing for certain is that those exposed to the market will benefit in
the short term the most from this QE announcement as the only thing it will
have an immediate impact on is push Equities to higher levels decoupling with
fundamentals, and is likely to continue to push higher to new all-time highs simply
because it has to. Money will be flooding the system, German 10 year as I write
yields 0.3% many other European yields are the lowest on record, thus the
Equity market presents the best yield.
Another problem with undertaking QE is that it also needs
commitment from the individual member states to act with fiscal reform to help
their respective countries, and many will shy away from real reform as the ECB
has taken the plunge for them.
Other countries in the European area including Switzerland
and Denmark are drastically cutting rates as the Euro gets smashed and it is a
stimulus overload at the moment as countries try to stave of deflation and
struggling economies. Talk is that Sweden will undertake QE as well.
The difference with the QE about to be undertaken by the ECB
and that which happened in the US and UK was that they began buying bonds at
much lower levels, and in fact the FED and BoE must be very nicely in the green
on their holdings. Whereas the ECB will be buying Bonds at record low yields
and they even said they will buy bonds with negative yields. When the unwind does
happen the ECB will be loaded up to the hill overpriced Bonds, surely not good
for their balance sheet.
Going forward the play will be to buy the dip in Equities as
the path of least resistance is up. We have seen from the past that QE is the
main driver of the market, the question is how low can the Yields go in Bonds. Bunds are touching 159, a level I never thought I would see, but at the rate
the Bunds are going higher negative Yields is a real possibility.
My longer term view is that there the massive amounts of
money printing will lead to a disastrous unwind, as we saw with the removal of
the Swiss cap. There is only so much the
market can be bought up on cheap money, and there will come a time where
fundamentals will take over.
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