“The ECB has embarked on a much larger version of QE than originally expected. Questions about whether it can be effective at current interest rate levels, whether it is needed and alleged opposition from Germany are possibly less important right now than the simple fact that the ECB is taking decisive action. This should encourage confidence in the midst of a nervous economic climate in European business.
“The scale of purchasing is significant, at up to €60bn a month, starting in March 2015 and expiring September 2016. This should help European economies to improve. There have been tentative signs recently (ECB bank lending survey, money supply data and German ZEW confidence surveys) that Europe’s economies are picking up very slowly – perhaps showing as we suspected that the Asset Quality Review (AQR) at the end of last year had indeed been acting as a blockage in the transmission pipe of previous ECB measures, such as TLTRO. But in the end, markets were screaming for intervention, and if the ECB had done nothing mayhem might have ensued. The decision was not unanimous, but it sounds like opposition was limited (no vote was needed).
“Once again ECB President Mario Draghi took the opportunity to reiterate the need for structural reform in Europe. Axel Weber (former Bundesbank President and now Chairman of UBS) made this point very clearly in the report of his interview from Davos. I interpret Draghi’s comments as saying that there is no more that the Central Bank can do – it is now over to Europe’s governments to get on with reform. He has provided the framework; now they must do their part.
“Perhaps the announcement of QE will be enough for markets to now focus on some facts: European markets are cheap relative to the USA – perhaps for good reason, but at extreme levels. Against their own history they are expensive in price/earnings (PE) ratio terms, but attractive from an income perspective. Furthermore, economies are improving, slowly. Finally, the falling oil price is acting as a massive boost for the consumer and a weaker euro vs the US dollar is a major benefit for European exporters.”
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