Cesar Perez
The European Central Bank (ECB) has been buying, as promised, about €60 billion worth of bonds per month.
The quantitative easing programme is supplementing the existing asset purchases programmes already in place – the acquisition of covered bonds and asset-backed securities.
For example, last month the ECB spent a total of €63.1bn on all these programmes, higher than April’s €60.3bn, with most of it going to the acquisition of sovereign bonds.
Who were the sellers? Data is frequently less than complete on this front.
What we do know is that domestic banks were net sellers of government debt in April, while as of March flows into bond and mixed funds were still strong, foreign investors were net buyers in the first quarter of this year and, in general, euro zone investment into foreign debt is accelerating.
After the summer it will be easier to see what were the significant changes in the banks’ balance sheets to get a better idea of whether it was banks offloading their sovereign bonds.
It is fair to say that up to now, the ECB has managed to fulfil its commitment.
The central bank’s quantitative easing has had a beneficial momentum effect, mainly through the currency, with the euro depreciating trend boosting prospects for exporters. In addition, retail sales and car registrations at levels higher than 2011 indicate that the European consumer is also recovering.
Furthermore, money supply has been rising since the introduction of quantitative easing. But this liquidity has yet to filter through to the general economy as it seems to be reflected mostly in financial markets.
We expect the ECB to continue its quantitative easing as its main mandate is core inflation, which is still falling (while headline inflation has bottomed).
Political risks persist in Europe. More importantly, Greece is not yet enrolled in a new bailout programme and is again on the brink of default.
While we believe the recent acceleration means a solution needs to be found by the end of this month and capital controls are still looking likely, we do not believe any of these developments to have systemic risk potential for now.
Politics remain a concern in Europe, however mitigated by the ECB’s continuing full commitment to the region.
Early quantitative easing results have been encouraging for the economy. Markets have reacted with typical optimism and equity valuations have skyrocketed.
We expect the ECB to manage inflation and growth expectations successfully, as long as structural reforms continue in Europe, domestic consumption steadies and the rest of the developed world keeps the recovery going.
While the fundamentals look positive, we remain cautious on European markets because of the high valuations and watch volatility created by the Greek situation as a potential buying opportunity.
Cesar Perez is the global head of investment strategy at JP Morgan Private Bank.
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