European quantitative easing: Reality bites
It may have taken Trump, Brexit and the threat of a global trade war, but the markets in Europe are finally waking up to what the end of QE will look like.
On June 14 Mario Draghi announced that quantitative easing in Europe would continue until December this year, with monthly purchases reduced to €15 billion a month from €30 billion in the interim. The ECB president indicated, however, that interest rates in the eurozone will remain at their present levels at least until mid 2019. He then inevitably capped it all off by stating that: “The Governing Council stands ready to adjust all of its instruments as appropriate to ensure that inflation continues to move...” towards its target.
As ever, the move is opaque – on the one hand indicating the end of QE and on the other not indicating the start of monetary tightening. Some commentators saw this dovish taper as a massive curveball, however, noting that it is highly unusual for the ECB to give the level of certainty. What is important is that the move comes as the effects of the withdrawal of QE are finally starting to bite in Europe.
Investment-grade debt markets are taking the brunt. In a QE world, nobody cared about events. Now they do. The iBoxx began the year at 45 basis points, and many now reckon it could be at 100bp by the end of it.