Uncertainty looms over Eurozone

Article by dailyfxpro.com

Clouds of uncertainty looms over Eurozone as the jittery financial markets are focused on Thursday’s ECB meeting, at which the bank is widely expected to unveil a quantitative easing program, and a Greek election on Sunday, which polls suggest anti-bailout party Syriza will win.

European shares hit fresh multiyear highs on Tuesday, overwhelmed by expectations that the ECB will this week venture into uncharted territory by authorizing purchases of government bonds in an effort to stimulate economic growth.

Government bonds in many European countries continued to hover close to record highs on the expectation that the ECB will act during its Thursday meeting.

The German central bank said on Tuesday that it was preparing to auction €5 billion ($5.79 billion) of five-year government bonds Wednesday with a coupon rate of zero. Spain, meanwhile, sold €9 billion of 10-year bonds at a record low yield of 1.656% Tuesday, via a syndicate of banks.

“We expect the ECB to announce a program of around €500 billion to €750 billion of [European government bond] purchases and our economists believe that the ECB will signal it will stay open so long as inflation and inflation expectations remain unacceptably low,” Barclays strategists wrote in a note.

Strategists at Société Générale, meanwhile, said they anticipate a program from the ECB that includes sovereign, agency and corporate bond purchases on Thursday.

“Given that a broad consensus expects a substantial QE plan to confront deflation risk and aid a stalling economy, disappointing the markets with the scope of the QE plan is a risk,” they said.

Nordea Bank in its quotes said:

• “While the heated QE discussions continue in the Euro area. Former ECB Governing Council member Orphanides argued that the idea of leaving national central banks responsible for the risks of their own sovereign bonds in connection with ECB QE would violate the EU treaty.
• He has a good point, as it is hard to see how such an approach would be consistent with the principles of single monetary policy. Still, ECB QE is also about finding compromises between many differing views, meaning that the eventual programme is unlikely to be the most efficient one.”

 They also stated:

• “The ECB’s bank lending survey revealed that loan demand by enterprises rose significantly in the last quarter of 2014, giving support to a pick-up in lending to enterprises going forward.
• Credit standards continued to be eased. These are clearly positive signs amidst all the gloom, but the pressure on ECB to deliver something substantial is still there.”

Societe Generale said:

• “The devil will once again be in the detail; trading the announcement on 22 January will be tricky.
• The ECB often announces the broad spirit of a new initiative, leaving the details for later, and that is a strategy that it should repeat, at the risk of initially disappointing investors.
• Other details around implementation can disappoint too. In particular we fear nationalisation of risk, with risks for bondholders.”

Barclays Capital said:

• “Positioning in European equities has been cut to an extreme underweight as risks have intensified around deflation and the Greek elections. While risks remain elevated, we see scope for positioning to normalize, particularly if the ECB announces EGB purchases at its Thursday meeting, as we expect.
• European equities should be well supported by the covering of extreme underweights by European equity mutual funds and global equity funds as well as potential inflows from under-allocated end investors.
• With positioning in European equities very supportive and euro shorts already near record 2012 levels, we see the trade in Europe being more about equity strength rather than outright euro weakness if the ECB delivers.”

Article by dailyfxpro.com