2018_10_28 — “Europe”
October 28, 2018
In Europe, quantitative easing (QE) will end later this year, interest rates are expected to stay on hold through at least the summer of 2019, and the European Central Bank (ECB) still believes (hopes) it is on course to normalize monetary policy. In his recent press conference Draghi attempted to distinguish the negative uncertainty around near-term economic and political developments, from more reassuring regional fundamentals. For example, euro area Q3 GDP numbers will probably disappoint (partly because of lower German auto sector production), which could lead the ECB to reduce quarterly growth projections at their December meeting. However, strong employment and wage growth underpin the ECB’s confidence that inflation will eventually return to target.
There are still tools at the ECB’s disposal to react to events whichever way they unfold. The Outright Monetary Transactions (OMT) program is there to support an individual government which explicitly asks for the ECB’s assistance as part of the European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) program. Alternatively, if needed, the ECB could rollout another six, twelve, or thirty-six month longer-term refinancing operation (LTRO) to provide financing to eurozone banks which are down -20% year-to-date. Also, the ECB has the ability to run a much larger Euro-system balance sheet for a more extended period of time, if that’s required.
Michael Ashley Schulman, CFA
Disclosure: The opinions expressed are those of Michael Ashley Schulman, CFA and are subject to change without notice. The opinions referenced are as of the date of publication, may be modified due to changes in the market or economic conditions, and may not necessarily come to pass. Forward-looking statements cannot be guaranteed; neither can backward-looking nor current-looking statements. This material is provided for informational purposes only and does not constitute an offer or solicitation to purchase or sell any security or commodity or invest in any specific strategy. It is not intended as investment advice and does not take into account each investor’s unique circumstances. Information has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed. Past performance is no guarantee of future results.