European indexes enjoyed a respite from their recent woes on Tuesday. Markets advanced after the European Central Bank suggested it could purchase corporate bonds as a means of economic stimulus.
Tuesday, October 21, 2014
With the current weakness in the eurozone, analysts are open to any measure that could relieve the pressure on the economy.
Indexes advanced across Europe. The benchmark Stoxx Europe 600 rose 1.3%. The DAX 30 of Germany gained 1.1%, the CAC 40 of France added 1.5% while the U.K.’s FTSE 100 advanced 0.9%.
ECB and corporate bond purchasing
The European Central Bank announced that it may buy corporate bonds in order to inject capital into the region’s failing economy, according to Reuters. Bank officials have not revealed a timeline for the potential strategy to take effect, though sources told Reuters the purchases might gain approval this December and begin in early 2015.
The corporate bond purchases could facilitate banks by giving them more monetary flexibility.
“[The program] would help by alleviating some of the pressures which weigh on the banks' balance sheet and that needs to be seen in the context of the upcoming asset quality review,” AXA Investment Managers' chief strategist Franz Wenzel told Reuters. “It would also help those corporates and those regions which were having difficulties in issuing corporate bonds, and I'm thinking of the south.”
However, not all economists are convinced this is the way to bring Europe’s economy out of the doldrums, according to The Wall Street Journal.
Stefan Isaacs, a corporate bond fund manager for M&G Investments, told the news source that the ECB has brought up the possibility of bond-purchasing before.
“I struggle to see that it will make a huge difference given how low corporate funding costs are already,” Isaacs continued, calling the news “another dodging tactic ahead of ultimately buying sovereign bonds.”
If the bank moves forward with its suggested plan, European stocks are likely to enjoy continued gains. But if and when the corporate bond purchasing program is revealed to be improbable, eurozone markets could be back to square one.
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