22 Jan 2015
A bold ECB QE program might further pressurize sovereign spreads – GS
FXStreet (Barcelona) - Analysts at Goldman Sachs are of the opinion that a bold QE program by ECB might extend the downward pressure on the EUR/USD and peripheral sovereign spreads.
Key Quotes
“Since President Draghi’s August 2014 Jackson Hole speech, when the shift towards tomorrow’s announcement was first set in motion, we have seen a weaker currency, a very sharp drop in Bund yields, an even sharper drop in longer-dated peripheral yields but a sluggish equity market.”
“The promise of ECB action does seem to have had some success in compressing sovereign spreads, as you would expect. It has also succeeded in raising the relative inflation profile of the Euro area to the US and, through that, in weakening the EUR/$ (spot and forward) exchange rate. But in part because inflation expectations have fallen across the major markets, it has not – at least so far – prevented a sharp fall in the absolute inflation expectations of the Euro area. As a result, while it has been accompanied by sharp falls in nominal long-dated yields (both Germany and even more so Italy and Spain), area-wide real yields have not fallen much.”
“Without any firm inflection in Euro area activity yet visible either, the combined impact of real rates and growth on equities has not been particularly helpful.”
“We think the downward pressure on both the EUR/$ rate and peripheral sovereign spreads probably still has some scope to extend, as long as the ECB QE program is sufficiently bold.”
“If growth improves, as we expect, we think Euro area equities are likely to be able to move higher in the coming months. QE will be helpful to the backdrop, but we believe the real impetus to activity comes largely from other sources. If that is right, the easing in Euro area financial conditions may continue.”
Key Quotes
“Since President Draghi’s August 2014 Jackson Hole speech, when the shift towards tomorrow’s announcement was first set in motion, we have seen a weaker currency, a very sharp drop in Bund yields, an even sharper drop in longer-dated peripheral yields but a sluggish equity market.”
“The promise of ECB action does seem to have had some success in compressing sovereign spreads, as you would expect. It has also succeeded in raising the relative inflation profile of the Euro area to the US and, through that, in weakening the EUR/$ (spot and forward) exchange rate. But in part because inflation expectations have fallen across the major markets, it has not – at least so far – prevented a sharp fall in the absolute inflation expectations of the Euro area. As a result, while it has been accompanied by sharp falls in nominal long-dated yields (both Germany and even more so Italy and Spain), area-wide real yields have not fallen much.”
“Without any firm inflection in Euro area activity yet visible either, the combined impact of real rates and growth on equities has not been particularly helpful.”
“We think the downward pressure on both the EUR/$ rate and peripheral sovereign spreads probably still has some scope to extend, as long as the ECB QE program is sufficiently bold.”
“If growth improves, as we expect, we think Euro area equities are likely to be able to move higher in the coming months. QE will be helpful to the backdrop, but we believe the real impetus to activity comes largely from other sources. If that is right, the easing in Euro area financial conditions may continue.”