Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, J.P. Morgan Asset Management Global Market Strategist Vincent Juvyns discusses the implications of the ECB meeting yesterday.
Yesterday’s ECB meeting shows that investors may have underestimated the significant of the measures undertaken in June. Draghi provided additional detail on how they will proceed with asset-backed securities (ABS) purchases and gave very early indications of how those measures may bear fruit. I see the first signs for example in the positive impact on the declining Euro. But as the ECB has stated, it will take time to assess the impact of these measures on inflation expectations. For the continued return to health of the credit markets and the financial system in Europe, reviving the ABS market is critical.
In my view, European banks will now participate with more engagement in the TLTROs programme now that the asset quality review results are in the rear window. That combined with the ECB asset purchases should help to trigger more life in the ABS market, where the investor community thus far has failed to act as a first mover. The ECB is clearly immersed in the details of implementing this programme and ensuring all the regulatory requirements are met; we heard more from them about that progress today.
We will have to see if this helps the European economy. The sign that the Euro has dropped 10% relative to the USD year-to-date is certainly a factor that will help to support European corporates, as they generate nearly half of their revenues from outside the region. If we look at the earnings season thus far, although only about half of the market cap has reported, the initial results are encouraging. At the moment Stoxx 600 earnings show a year-over-year growth of nearly 18%, which is quite substantial.
In my view, the market may be overestimating the added value potential of a fully-fledged quantitative easing programme in Europe. Draghi is prudently keeping the door open, but I continue to have doubts about the necessity of such a measure. When I look at 10 year peripheral bond yields around 2.3%, I have the impression that much less creditworthy countries pay as much to borrow as the US, which is by far the most liquid and highest rated in the world.
Most countries in Europe are financing themselves at short-term negative rates at the moment. So I’m not sure I see the value of doing quantitative easing on government bonds – I think the credit programme is far more relevant to the challenges facing the Eurozone. It is not so much a country solvency issue but one of reigniting lending and growth in the eurozone.
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