Bond-buying era draws to close as euro area faces increased risk

Gladys Abbott
June 17, 2018

The bank will halve the size of monthly asset purchases to €15bn after September and phase them out entirely by the start of 2019. Scenarios include reducing the purchases past September, and then stopping them at year-end. The ECB will stop its bond-buying scheme, worth €30bn a month, despite a recent slowdown in the bloc's recovery.

Asset purchase program is not disappearing, instead, it remains a normal instrument of monetary policy, said Draghi. The benchmark main refinancing rate remains at zero and the deposit rate at minus 0.4 per cent.

The rate-sensitive financial sector was the biggest percentage loser of the S&P 500, led by a 1.8 per cent decline in JP Morgan Chase shares, as US Treasury yields fell on news that the European Central Bank would be holding rates steady for longer than many investors expected.

Guindos added that the monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2 percent over the medium term.

"To be sure, the Fed is not inclined to hike rates any more than gradually after years of mostly over-optimistic predictions for inflation and economic growth, and disappointing wage gains of around 2.5 percent annually".

"I think its pragmatic for the Fed to take these moves, because if you are not going to make them now, when are you going to take them", Kully Samra, European managing director at $3 trillion USA asset manager Charles Schwab, said.

"We are in an altogether different world to only a couple of years ago", said Patrick O'Donnell, senior investments manager at Aberdeen Standard Investments. "So that's good news on top of good news and that's really what's driving markets today".

The ECB's crisis-era monetary support has been credited with reviving the eurozone economy, which grew by 2.3 per cent in 2017.

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"The ECB has mapped out a definitive trajectory for quantitative easing and set a far-off date for the earliest rate hikes".

Draghi, the President of Europe's central bank (the ones that print the money and control the interest rate, among other things), seems to feel Europe's on the up - so he's stopped pumping money into it. "It is certainly a possibility now".

"We have reservations about the strength of the eurozone economy, so retain no direct exposure to European bonds and keep our client portfolios under-exposed to the adverse effects of rising bond yields globally". Futures markets are pointing to stronger opening moves across the region.

This is in line with investors' expectations.

"Remember that the central bank had to purchase assets indiscriminately - it was not able to pick winners and losers".

The yield spread between USA 30-year bonds and US 5-year notes narrowed to the flattest level since January 2012 after the Fed decision on Wednesday.

"Governments need the discipline of the free-functioning market as an incentive to focus on sound sustainable policies that promote growth in their economies and businesses".

"Stepping back from QE will insulate the European Central Bank from potential criticism that it is funding the fiscal largesse associated with certain populist policies".

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