ECB Strongly Signals QE In 2015

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Includes: FXE, IEV
by: Invesco US

Summary

Mr. Draghi made a very strong case for why the central bank should be able to use sovereign QE as a monetary tool going forward.

Although a formal plan for QE was not announced, we believe it’s imminent and should support European risk assets.

We anticipate continuing divergence between the major economic blocs, with the ECB likely to provide greater easing, while the Fed continues to remove stimulus.

By Rob Waldner, Nicholas Wall and Mark Nash

In our view, European Central Bank (ECB) President Mario Draghi signaled in last week's press conference that he could unveil plans for quantitative easing (QE) in Europe, potentially as soon as the first quarter of 2015.

The case for QE

Mr. Draghi made a very strong case for why sovereign QE is effective and why the central bank should be able to use sovereign QE as a monetary tool going forward. While markets seemed disappointed that a formal plan for QE was not announced, we believe it's imminent and could support European risk assets. In addition, a weaker outlook signaled by the ECB cutting its growth and inflation forecasts in this latest meeting could pave the way for the announcement of QE sometime during the first quarter.

Mr. Draghi's press conference offered investors three main takeaways:

  1. He highlighted the benefits of QE and justified its use as a legitimate monetary policy tool.
  2. The ECB will not require a unanimous decision to go ahead with QE, indicating that that central bank appears prepared to proceed despite the likely objections of some on the governing council.
  3. If the ECB buys bonds via sovereign QE, the bank would be "pari-passu" with private bondholders. In other words, the ECB would be willing to take losses, if they occur, along with private creditors. This is important to make QE effective, in our view.

Key macro themes intact

We expect continued divergence between the major economic blocs: The ECB is likely to provide greater easing, while the Federal Reserve (Fed) continues to remove stimulus. We believe this divergence will continue to drive a number of developments in the markets - namely, a stronger dollar against the euro, the yen and Asian currencies broadly. It will probably also lead to further volatility as we move closer to a Fed interest rate hike. Nevertheless, we would expect high-quality European risk assets to be well supported in a QE environment.

Important Information

"Pari-passu" is a Latin phrase meaning "equal footing" that describes situations where no preference is displayed.

Volatility is a statistical measure of the dispersion of returns for a given security or market index.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

Many countries in the European Union are susceptible to high economic risks associated with high levels of debt, notably due to investments in sovereign debts of European countries such as Greece, Italy and Spain.

The information provided is for educational purposes only and does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Invesco does not provide tax advice. The tax information contained herein is general and is not exhaustive by nature. Federal and state tax laws are complex and constantly changing. Investors should always consult their own legal or tax professional for information concerning their individual situation. The opinions expressed are those of the authors, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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