The European Central Bank’s (ECB’s) new €1-trillion-plus asset purchase program arrived last week and did not disappoint. As I write in my weekly commentary, stocks advanced on the news of quantitative easing (QE), and international markets in particular got a big boost from the event.
A few quick points on the ECB QE: The central bank plans to purchase €60 billion a month of bonds with maturities ranging from 2 to 30 years until at least September of 2016. The size of the package, the open-ended nature of the commitment and the willingness to purchase longer dated bonds all came as positive surprises to investors, driving this past week’s strong equity rally.
By itself, QE is unlikely to spur European growth, but it should go a long way in mitigating the risk of deflation and supporting European equities, particularly in peripheral countries, where stocks are already up sharply year-to-date. In fact, the positive response in the market was partly a function of fortuitous timing. The announcement came at a time when European indicators appear to be bottoming. For example, recent business surveys out of Germany have turned higher.
But the euphoria over Europe may not last long. With the Syriza party winning the early Greek election and forming an anti-austerity coalition government, all eyes are on how the new government will manage debt negotiations with the Troika––the ECB, European Commission and International Monetary Fund. A prolonged period of heightened tension and difficult debt negotiations is a possibility, though the ECB QE is serving as a sort of backstop holding down contagion risks for now. It is also important to note: The majority of Greeks have expressed a desire to remain in the euro. Compromises on debt terms and budget constraints are likely in our view.