Forex trading – European Central Bank meeting could offer up a surprise.

Could the European Central Bank (ECB) start buying equities? That’s the question being posed by some analysts ahead of its policy meeting on Thursday, September 8th, as the bank is running out of bonds to buy.

The ECB, which launched its quantitative easing (QE) in January 2015 in a bid to stave off deflation, recently surpassed the €1 trillion mark of government bond purchases. With bonds enjoying a record-breaking rally, yields are being squeezed, making fewer and fewer eligible under the bank’s own rules.

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Bond Shortage

 

The ECB is currently buying around €80bn a month in mainly government bonds, under a scheme due to end in March 2017.

But bonds have rallied so much the ECB is running out of paper to buy. The yield on 10-year bunds has turned negative and according to some estimates, all German bunds will be ineligible by November. Currently around half are too pricey, with a yield below the -0.4% floor – equivalent to the deposit rate. ECB rules mean the QE purchases need to match the size of the country’s economy – the capital key - which forces the bank to hoover up a lot more German bonds than it would like.

The ECB may well act sooner rather than later. It could scrap the capital key element, or move the yield floor. Both options are controversial in their own way.

Even more contentious, and therefore less likely to pass the judgment of the governing council, would be to begin buying equities.

Many think the ECB would be justified in purchasing stocks. Assets are assets, so why not lump equities in with bonds? The Swiss National Bank has been doing it for years, while the Bank of Japan is buying up shares and exchange-traded funds (ETFs) at an unprecedented rate.  Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, reasoned with the Wall Street Journal that there is no reason not to do it.

Pressure

 

The reason the ECB is under pressure to act is simply one of necessity – the Eurozone economy continues to limp along. The latest PMI reading slid to a 19-month low, as growth in the key German market slowed.

Chris Williamson, chief business economist at IHS Markit, said: “The survey data will fuel expectations that the ECB would prefer not to wait before injecting more stimulus into the economy, adding pressure for policymakers to act later this week to help shore up confidence in both the outlook for the economy and the bank’s commitment to its inflation target, even if simply by extending its QE programme.”

Meanwhile inflation continues to undershoot. Latest figures from Eurostat show prices edged up barely 0.2% in the 12 months to August, well short of the ECB’s 2% target. Since launching embarking stimulus, the ECB has made very little progress on inflation.

Whether the ECB doves want to tweak bond purchase rules or rush into equities, they will likely have a fight on their hands with other more hawkish members of the Governing Council, notably the Bundesbank chief Jens Weidmann.