Mario’s miracle?
European monetary policy has boosted stockmarkets and weakened the euro
Mar 14th 2015
ONCE again Mario Draghi, the president of the European Central Bank, is living up to his “Super Mario” nickname. In 2012 he stabilised markets with his pledge to do “whatever it takes” to save the euro. This year he has pulled off a similar trick by adopting quantitative easing—the printing of money to buy assets. This week the ECB started buying government bonds; it was already snapping up asset-backed securities and covered bonds.
The announcement of QE in late January helped revive investor sentiment after a tricky start to the year. Global stockmarkets rose by 5.3% in February, according to Standard & Poor’s, with four in the euro zone (Austria, Greece, Portugal and Ireland) posting double-digit gains.
Easier monetary policy is not the only factor behind the rally. Investors were relieved when Greece and its creditors agreed on a four-month extension of its loan programme. That reduced the risk of a Greek exit from the euro zone (although Greece’s financial health remains poor).
The sharp fall in the oil price has also acted as a tax cut for European consumers, adding to hopes that the continent’s economy is escaping from the doldrums. Citigroup’s economic-surprise index for the euro zone, which reflects whether data have underperformed or beaten expectations, has jumped from -57.3 in mid-October to +49.5 on March 9th. The ECB has raised its growth forecast for the current year from 1% to 1.5%; the OECD says it sees “tentative signs of a positive change in growth momentum in the euro area”.
No one expects the kind of growth that would make the Chinese envious. But the recent data come in the context of years of unrelenting gloom, when investors seemed to doubt that the euro zone would ever grow at all.
Further positive news has come from the European banking sector. Since 2008 banks have focused more on strengthening their balance-sheets than on lending to companies. This credit squeeze was bad for growth. But things have been picking up. The broad measure of money supply (M3) grew by 4.1% in the year to January; 12 months earlier, the annual growth rate was just 1.2%. M1, a narrower measure, bears out the trend: its growth has jumped from 6.2% to 9% over the same period.
Large companies have also been able to take advantage of very low yields in Europe’s bond markets.
The ECB has played a role here too: investors have anticipated the launch of QE by driving government-bond yields sharply lower. The yields on two-year bonds in France, Germany and the Netherlands, among others, are negative. Germany’s ten-year bonds yield is just 0.23%, which means it has replaced Japan as the world’s lowest-cost borrower.
That has prompted return-chasing investors to pile into corporate debt; the yield on the bonds of Nestlé, a Swiss foods group, has gone negative as well. European companies have not been alone in taking advantage. In the first two months of the year, American companies issued over €18 billion ($19 billion) of euro-denominated debt, a 160% increase on the same period in 2014.
Coca-Cola alone sold €8.5 billion of bonds. Investors submitted €20 billion of orders for them, even though the firm was offering yields as low as 1.65% on 20-year bonds.
The rest of the world may not be quite so positive about another consequence of the ECB’s action: the sharp fall in the euro (see chart). It dropped below $1.06 on March 11th, its lowest level since early 2003. That is not just a matter of euro weakness; the dollar has been rising against the yen as well, as investors anticipate that, later this year, the Federal Reserve will push through the first rate rise since the financial crisis. The dollar is now at its highest level against major currencies, in trade-weighted terms, since 2003.
That matters for America’s exporters. Although its trade deficit is still benefiting from rising domestic production of shale oil and gas, the non-oil trade deficit was nearly $50 billion in January, more than $10 billion above the same month last year. And the profits of American companies suffer when foreign earnings are translated into dollars; estimates for profits growth this year have been revised down from 9.1% to 2.1% in recent months.
If European QE is to be positive for the world, rather than just the euro zone, then it has to revive demand, not merely grab market share on behalf of the continent’s exporters. The example of Japanese QE is rather patchy in this respect: three of the past five quarters have seen a decline in economic activity (although the effect is obscured by a rise in the consumption tax). Investors clearly have faith that Super Mario’s plan will work better.
The announcement of QE in late January helped revive investor sentiment after a tricky start to the year. Global stockmarkets rose by 5.3% in February, according to Standard & Poor’s, with four in the euro zone (Austria, Greece, Portugal and Ireland) posting double-digit gains.
Easier monetary policy is not the only factor behind the rally. Investors were relieved when Greece and its creditors agreed on a four-month extension of its loan programme. That reduced the risk of a Greek exit from the euro zone (although Greece’s financial health remains poor).
The sharp fall in the oil price has also acted as a tax cut for European consumers, adding to hopes that the continent’s economy is escaping from the doldrums. Citigroup’s economic-surprise index for the euro zone, which reflects whether data have underperformed or beaten expectations, has jumped from -57.3 in mid-October to +49.5 on March 9th. The ECB has raised its growth forecast for the current year from 1% to 1.5%; the OECD says it sees “tentative signs of a positive change in growth momentum in the euro area”.
No one expects the kind of growth that would make the Chinese envious. But the recent data come in the context of years of unrelenting gloom, when investors seemed to doubt that the euro zone would ever grow at all.
Further positive news has come from the European banking sector. Since 2008 banks have focused more on strengthening their balance-sheets than on lending to companies. This credit squeeze was bad for growth. But things have been picking up. The broad measure of money supply (M3) grew by 4.1% in the year to January; 12 months earlier, the annual growth rate was just 1.2%. M1, a narrower measure, bears out the trend: its growth has jumped from 6.2% to 9% over the same period.
Large companies have also been able to take advantage of very low yields in Europe’s bond markets.
The ECB has played a role here too: investors have anticipated the launch of QE by driving government-bond yields sharply lower. The yields on two-year bonds in France, Germany and the Netherlands, among others, are negative. Germany’s ten-year bonds yield is just 0.23%, which means it has replaced Japan as the world’s lowest-cost borrower.
That has prompted return-chasing investors to pile into corporate debt; the yield on the bonds of Nestlé, a Swiss foods group, has gone negative as well. European companies have not been alone in taking advantage. In the first two months of the year, American companies issued over €18 billion ($19 billion) of euro-denominated debt, a 160% increase on the same period in 2014.
Coca-Cola alone sold €8.5 billion of bonds. Investors submitted €20 billion of orders for them, even though the firm was offering yields as low as 1.65% on 20-year bonds.
The rest of the world may not be quite so positive about another consequence of the ECB’s action: the sharp fall in the euro (see chart). It dropped below $1.06 on March 11th, its lowest level since early 2003. That is not just a matter of euro weakness; the dollar has been rising against the yen as well, as investors anticipate that, later this year, the Federal Reserve will push through the first rate rise since the financial crisis. The dollar is now at its highest level against major currencies, in trade-weighted terms, since 2003.
That matters for America’s exporters. Although its trade deficit is still benefiting from rising domestic production of shale oil and gas, the non-oil trade deficit was nearly $50 billion in January, more than $10 billion above the same month last year. And the profits of American companies suffer when foreign earnings are translated into dollars; estimates for profits growth this year have been revised down from 9.1% to 2.1% in recent months.
If European QE is to be positive for the world, rather than just the euro zone, then it has to revive demand, not merely grab market share on behalf of the continent’s exporters. The example of Japanese QE is rather patchy in this respect: three of the past five quarters have seen a decline in economic activity (although the effect is obscured by a rise in the consumption tax). Investors clearly have faith that Super Mario’s plan will work better.
0 comments:
Publicar un comentario