Ecb Searches For Bonds
European markets declined during Wednesday trading following six consecutive sessions of gains.
Wednesday, February 25, 2015
The Stoxx Europe 600 had risen to a 7-year high before slipping on Wednesday. The index fell 0.2% due to losses in the energy, consumer goods, financial and telecommunications sectors.
Other major indices declined as well. The German DAX lost 0.1%, the French CAC 40 also dipped 0.1%, while the UK’s FTSE 100 dropped 0.3%.
Even with European stocks’ previous advancement, the indices “look alluringly inexpensive relative to their peers, with the region trading at a record discount to US stocks on a 5-year through the cycle [price-earnings] basis since 1970,” Matt Sherwood, head of investment markets research at Perpetual, told MarketWatch in a note.
ECB struggles to find bonds for QE
The European Central Bank recently instated a quantitative easing program as a mean of economic stimulus, according to The Wall Street Journal. Now, the ECB promise to purchase hundreds of billions of euros worth of government bonds for the QE program has faced an obstacle – finding the bonds to begin with.
Analysts doubt the ECB will be able to procure the top-rated government bonds it desires, especially those belonging to Germany.
“[European] passive investors and banks are unlikely to sell bonds in large size due to investment mandates and regulatory reasons,” Cagdas Aksu, rates strategist at Barclays, told The Wall Street Journal. “The logical assumption is that everybody is going to sell and move into something else, but not everybody can do that.”
The ECB bases its choice of government bonds for QE on each nation’s portion of European Union population and gross domestic product. On those terms, Germany should comprise the largest share of bonds – €215 billion between March and September 2016. However, analysts at Morgan Stanley expect the German government bond market to fall well short of that mark.
The shortage of German bonds could prove to be an obstacle for the ECB’s stimulus plan. But some investors are confident the organization will find a way to satisfy its requirements for QE.
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