Euro Area Macro Viewpoint All you may need to know about ECB QE

BofA Merrill Lynch Global Research - Jueves, 17 de Abril

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Economics of ECB QE: target what you wish for As inflation disappoints and inflation expectations fall, the possibility that the ECB will have to resort to unconventional policies has increased. ECB QE would target "asset purchases that aim to alter the monetary policy stance" in order to (1) lift inflation expectations, (2) repair the transmission mechanism, (3) weaken the EUR.  

Market expectations of near term action will be disappointed 

In our view, ECB QE is unlikely before Q3. A Q2 downside surprise relative to the ECB's current inflation profile would first trigger rate cuts. After the AQR, the ECB may launch "credit easing measures", not to be confused with QE. Only if inflation failed to pick up in line with the ECB's view in Q3 would we expect QE to be set up. 

€ 1 tn should achieve the ECB's objectives

The structure of bond markets, regulatory constraints in ABS, and the communication challenge surrounding such a new strategy imply that the ECB will have little choice but to purchase government bonds as well as private sector assets, in our view. We believe at least €75 bn (€40 bn in government bonds) per month (€1 tn total) would be necessary to achieve the ECB's objectives. 

Market implications:

Rates: Positioning for a widening of EUR rates vs the US, a rally in EUR real rates, and peripheral outperformance are the most obvious QE trades in our view… 

FX: Large QE, with a strong ECB commitment to achieve its inflation target would have the most negative EUR impact. In contrast, QE through bank support may even be positive for EUR under certain conditions...

Equity: QE which is EUR negative vs. USD would be a positive for the more defensive export driven sectors in Europe: Health Care, Food and Bev, PHH and Oil & Gas…

Credit: QE would accentuate the run for credit and could particularly benefit senior financials if ABS are targeted…

EM: QE would likely affect EM mainly through EUR/USD. FX is likely to strengthen vs EUR but weaken vs USD. Carry trades should benefit…

ABS: To revive ABS markets sustainably, beyond ECB purchases, requires regulatory changes to address the calibration of regulatory capital, create a level playing field and better differentiate heterogeneous ABS products…

 

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