Date
13 December 2017
The ECB stimulus may pump excessive liquidity into markets but the support to stocks might be offset by a stronger dollar and a negative impact on emerging economies. Photo: Bloomberg
The ECB stimulus may pump excessive liquidity into markets but the support to stocks might be offset by a stronger dollar and a negative impact on emerging economies. Photo: Bloomberg

Why ECB stimulus is nothing like the US version

The final size of the eurozone quantitative easing (QE) is double the market expectation of 550 billion euros (US$620 billion).

As a result, the euro has slumped below 1.11 against the US dollar, the lowest in more than 11 years.

However, the monetary easing has had some effect on the equity market, particularly European stocks. Some of Europe’s stock markets have been the best performers this year.

Such massive money printing by the European Central Bank (ECB) has spurred market speculation that the move would offset the negative impact of the US Federal Reserve’s QE exit.

The third round of QE in the US in late 2012 sparked a wave of equity market rallies worldwide.

However, the picture looks less promising in terms of potential boost to the stock market. The European QE may have limited benefits for equity markets in the long term given that European banks have shown little interest in massive lending.

Long-term refinancing launched in late 2011 and early 2012 showed that although the ECB balance sheet expanded from about 2 trillion euros to more than 3 trillion euros, much of the liquidity ended up in the ECB; some banks even repaid loans to the ECB in advance.

There are various structural and regulatory issues that make European banks reluctant to lend money to companies.

The greenback looks set to gain further strength.

Unlike QE in Europe, QE in the US created substantial liquidity in financial markets, which in turn drove up asset prices and stock prices.

And the US dollar came under pressure from QE, indirectly benefiting commodity prices and helping several emerging markets or economies that rely on commodity exports.

That created even more growth momentum in the stock market.

However, monetary easing by the ECB may not have such effect.

It will only further strengthen the US dollar and jeopardize emerging economies and weigh on stocks.

That is to say, the ECB move may pump liquidity into markets but the support to stocks might be offset by a stronger dollar and a negative impact on emerging economies.

Meanwhile, the MSCI Emerging Markets Index has shown an uptick recently amid improving market sentiment.

However, the JP Morgan Asia Dollar Index or JPMorgan Emerging Markets Currency Index continues to weaken, which shows that global investors have yet to return to emerging markets despite the stable sentiment.

Also, European households invest only 25 percent of their assets in stocks and funds compared with 45 percent by their US counterparts.

Monetary easing may have less impact in terms of “wealth creation” in the eurozone. And it would be less obvious in channeling private investors into equity markets.

Investors should curb their expectations about the ECB stimulus. It’s nothing like the one we’ve seen ín the US.

This article appeared in the Hong Kong Economic Journal on Jan. 29.

Translation by Julie Zhu

– Contact us at [email protected]

JZ/JP/RA

Hong Kong Economic Journal chief economist and strategist

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