Europe quantitative easing
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According to Willem Buiter, the central banks of the eurozone member states could go bust. We think he overstates the risk.
The ECB’s direct buying of corporate bonds is also a way of accelerating the development of European capital markets.
They may have been investment-grade, but Steinhoff’s bonds have been a bad deal for the ECB.
Where the BoJ leads the ECB may/may not follow. You will all remember that last week the BoJ unveiled QQE with yield control — a 10yr yield target that may signal the end of QE as we know it.
This is a guest post from Richard Koo, chief economist of the Nomura Research Institute and, amongst many other things, author of “The Holy Grail of Macroeconomics, Lessons from Japan’s Great Recession”, which lays out his balance sheet recession thesis in detail. The post is an updated extract from his most recent note for Nomura and reproduced here, with his permission, for your arguing pleasure… The US, the UK, Japan, and Europe all implemented quantitative easing (QE) policies, but the understanding of how those policies work apparently differs greatly from country to country, leading to very different outcomes. With the US economy doing better than the rest, there has been some debate in Europe as to why that is the case.
A new era – German 10-year bund yield drops below zero for the first time: pic.twitter.com/XJAoFDZ3mE — Tracy Alloway (@tracyalloway) June 14, 2016 Yeah. Fun. This is also fun: Make that 50% of Bunds no longer eligible to ECB QE! (€400bn out of €810bn) pic.twitter.com/y8qP7fHk3c — Frederik Ducrozet (@fwred) June 14, 2016
It’s all a bit messy at the moment — European banks, Japanese banks post the BoJ’s move negative, er other stuff — but it’s not really clear what’s actually going on. This seems like a decent list of possibilities, from Citi’s Steven Englander: We think the following concerns are weighing on the market. 1. US economic fragility means there is no one to depreciate against 2. Too many simultaneous issues and policy coordination unlikely. 3. QE/negative rates have lost their financial market impact, 4. QE/negative rates have lost their economic impact 5. QE/negative rates are constrained by bank profits But his colleague Matt King has a somewhat more involved, if not entirely separate, explanation for what he says is, at the surface, an orderly sell-off but which hides a number of indicators under “extreme stress”. Basically, it’s all about bank balance sheets coming under pressure. Less basically, he suggests these dislocations “raise awkward questions about the entire narrative which led to the wave of post-crisis bank regulation.”
ICYMI, and on the back of the BoJ going negative, “the universe of DM government bonds trading with a negative yield rose to a record high of $5.5tr, or 24% of the JPM Global Government Bond Index,” according to JPM.
Here’s the Fed’s recent hike in context, courtesy of BofAML’s Hartnett et al. You might need to squint… When you’re done squinting, you might also dwell on the fact that long-term rates matter much more than short-term rates in the US and that we might be about to enter “conundrum” territory once again,
A tiered depo rate (to be explained below) coming from the ECB at their meeting on Thursday, you say? Allowing them to potentially push past the expected (per our inboxes) coming cut in the depo rate by 10bps to -0.30 per cent, alongside other easing measures? Well… the mooted tiered system itself wouldn’t be unprecedented and we look forward to even the expected cut allowing our go-to measure of euro-nuttiness to keep ticking up. From JP Morgan’s Niko Panigirtzoglou and team over the weekend: