David Jane: The market’s obsession with eurozone QE

Jane David Miton 2014

In many ways the market’s obsession with eurozone QE is understandable.

It was way back in July 2012 that European Central Bank head Mario Draghi drew a line in the sand stating the ECB would “do whatever it takes”.

This had a massive impact in calming financial conditions, especially in the extremely stressed periphery markets. 

It served its purpose at the time, largely because it was an open statement that had credibility. However, the data dependency of the statement has meant that markets have been obsessing on when (or if), how, and what it means in practice. 

Indeed, many financial market indicators have continued to improve, but economic data has gone from bad to worse with economic activity and consumer prices flirting with recession and deflation respectively. So there is increasing pressure on Draghi to show his cards.

Sometimes it just feels like a good old-fashioned market drama.

In fact it has got everything a good drama needs: a protagonist (the suave Italian), the goodies (anyone who supports easy money), the baddies (the Bundesbank), the plot (will the ECB join the ‘big boys’ and engage in full quantitative easing, or not?), a few subplots (tension within the ECB and amongst other central banks) and an ending which is keeping everyone guessing.

Sometimes it feels like a comedy, but it always feels fairly tragic. 

We don’t mean to belittle what is a serious situation just to explain that markets seem to have got carried away with the drama of it all. A key area of fascination for markets, which feels like a microcosm of the political shortcomings within the economic union, is being played out by Bundesbank hawk Jens Weidmann and Draghi. This was summed up in dramatic style by a recent Bloomberg article entitled, ”ECB clash resumes as Draghi spars with Weidmann on stimulus”. 

Maybe we are feeling a bit festive but at times it does seem like a pantomime: high on entertainment but ultimately fairly predictable.

For all this obsession over the outcome we believe that whatever the ‘ending’, it will have little impact on the real economy.

If we’ve learnt anything from this crisis it’s that with a broken monetary transmission mechanism monetary policy drives financial markets, whereas fiscal policy is a more effective driver of economies. 

In the short-to-medium term, key to the eurozone real economy is global end demand and, in the absence of a pick-up, prospects look fairly grim. Sure, an announcement of public QE would likely see the euro and bond yields trend lower and this would provide some stimulus to the economy, but how far can they go from here?

Eurozone equity in our portfolios is limited to defensive positions like utilities and infrastructure, as well as a small amount of exposure to some of our themes, including onshoring and new energy. This exposure is largely hedged back into sterling and we no longer have exposure to eurozone government bonds. 

David Jane manages Miton Group’s multi asset funds