US earnings season overshadowed by historic ECB QE

Yesterday it was all about the ECB’s much anticipated Monetary Policy Meeting, whereby Draghi delivered a jaw-dropping €60bn monthly asset purchase programme, scheduled to start in March 2015 and targeting to end in September 2016 or beyond if necessary. The announcement exceeded market expectations in terms of size and shape and is expected to be worth at least €1.1trn, sufficient to expand the ECB’s bank balance sheet back to 2012 levels. Questions as to whether this asset programme will suffice to revive the eurozone economy or prevent a prolonged period of deflation remain. What is key from Mario Draghi’s announcement yesterday is reference to the fact that the asset purchase programme could be expanded beyond September 2016, pledging to continue its purchases “until we see a sustained adjustment in the path of inflation”.

It was going to be challenging for Draghi to word his asset purchase programme correctly before this weekend’s Greek elections. In essence, it is a known fact that the ECB is already a holder of Greek debt (via the purchases made under its Securities Markets Programme) and indirectly sent the message that it would be limiting its purchases of Greek bonds, by imposing a 33% debt limit of all outstanding Greek debt. What needs to be made clear is that the €60bn worth includes the current €10bn monthly asset purchase programme, making it effectively a €50bn announcement.

Bonds purchases will be of both investment-grade sovereign bonds as well as the debt of European agencies and Institutions. A point worth mentioning is that most of the sovereign debt purchases will not be subject to “loss-sharing” which effectively means that the inherent risks will remain with national central banks. To this, Draghi claimed that it would not limit the economic effects of quantitative easing.

Following the announcement, peripheral bond yields declined, suggesting that at first glance, the size and across-the-board characteristic of the programme is undermining concerns about the lack of risk-sharing.

What is good is that expectations were met, investor sentiment is high, the bund is rallying and equities are following suit. What would be interesting from this point forth is to see how the euro reacts to this news, which, at the time of printing stood at a level of 1.1337 against the dollar depreciating from 1.2098 since the start of the year. It is important to keep it in mind, and we have mentioned this in one of our articles earlier on this year, that QE worked in the UK and US, whilst the Japanese continue to print money as QE had little or no impact to shore up inflation. All in all, it has been quite a bold move by the ECB, but this does not necessarily mean that the single currency region is out of the doldrums.

US earnings season has been overshadowed by events in the Eurozone this week. Following the somewhat weaker-than-expected results for the US banks, next week we turn our focus on some of the largest blue chip US equities, such as Apple, Boeing, Caterpillar, McDonalds, General Electric, and P&G, to name a few. Following the sub-par retail sales in December, analysts would be eager to closely scrutinise earnings releases next week as US equity markets continue to grind higher.

On the data front, we have got quite a number of key prints today on both sides of the Atlantic. In the Eurozone, we await key Manufacturing, Services and Composite PMIs of the Euro-area region, Germany and France whilst French manufacturing confidence is also one to look out for. Elsewhere, UK retail sales and US existing home sales and manufacturing PMI will be pivotal in determining the health and situation of the respective economic recoveries and will most likely be factors which the Bank of England and US Federal Reserve will consider with respect to their possible easing monetary policies.