Investors Mull Ecb Meeting
European stocks started out strong on Tuesday but changed directions in midday trading.
Tuesday, March 3, 2015
Investors chose to play it safe as they await an important European Central Bank policy meeting on Thursday, especially considering that stocks have performed better than expected recently.
Additionally, analysts are still uncertain of the exact terms surrounding the ECB’s planned asset purchasing program, or quantitative easing, which could begin as soon as March 9. At the very least, investors hope Thursday’s ECB meeting will provide insight as to the direction of the market and the scope of the quantitative easing plan.
The Stoxx Europe 600 began the day up 0.2% but fell flat in the afternoon. The UK’s FTSE 100 fell 0.1%, Spain’s IBEX 35 lost 0.5%, while France’s CAC 40 lost 2 points.
QE is far from a guaranteed solution
The ECB’s 1.1 trillion euro asset-buying program has not even officially begun, but already quantitative easing may have damaged bond yields and cost defined-benefit pension plans as much as 92 billion euros, Bloomberg reported. Once QE begins, it could move those yields back further and ruin companies’ credit ratings.
In response to a situation in which bond yields are significantly undermined, these organizations would have to take such measures as freezing pensionable salaries, increasing the retirement age and eliminating pension plans to new members.
“The risk remains that QE achieves nothing more than promoting stagflation in the euro area,” Paul Watters, credit analyst at S&P, said in a statement, according to Bloomberg. “A combination of weak growth, inducing the ECB to continue with its aggressive monetary-policy stance, and rising inflation would be a treacherous combination for DB-pension schemes already struggling to contain their plan deficits.”
Those are just the possible results of a successful QE program. If the asset-purchasing plan fails to boost the economy as hoped, those low bond yields might be accompanied by weak economic growth and overactive inflation.
Having said that, there is still no guarantee that QE won’t succeed or the ECB cannot effectively navigate through these potential risks. For that reason, investors are increasingly interested in what Thursday’s meeting has in store.
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