Emma Wall: Hello and welcome to the Morningstar series 'Market Reaction'. I'm Emma Wall and here with me today is Kerry Craig, global market strategist for JPMorgan. Hello, Kerry.
Kerry Craig: Hello.
Wall: So we're here today to talk about Europe. There are some rumours this morning there may be a QE package. Do you have the details?
Craig: Yes, we've had a Minister from the European Central Bank (ECB) come out and talk about the fact that perhaps sovereign bond buying might come a little bit earlier than perhaps (ECB President) Mario Draghi is letting on. There is definite movement and shift toward the ECB doing more next year in terms of what it can do and increasing the money supply. I think they have a very credible pipeline in place at the moment. They want to see that pipeline push through into the economy before they do more bond buying in terms of government bonds or even non-financial corporate bonds.
The big picture thing will be the December TLTRO (Targeted Long-Term Refinancing Operation), what the take up is of that by banks. The one they did last month was a little bit weak, they are little bit worried about the pickup. If we see a strong number there, I think that will alleviate some of the concerns about sovereign QE and maybe pushed back the expectations for when that will happen next year.
But to get to that all-important €3 trillion figure on the balance sheet that the ECB wants and to increase it by €1 trillion I think more bond buying of some form is going to have to happen next year.
Wall: And how will that work? Because we kind of understand how QE works in one country with a single market. But that’s not what the Eurozone is.
Craig: No this is the added complexity you have with the Eurozone, it's 18 countries. It's 18 different central banks all feeding into the ECB and sharing their views. That was a very important point last month, when Mr. Draghi had his November press conference, he really took the opportunity to tell the markets that he had his house in order and this was a consensus view that he was putting forward. The ramification of whether sovereign bond buying would actually work and actually go towards helping the Eurozone is still up for debate.
In the UK and in the U.S. you had bond buying of government bonds which actually works to lower corporate bond yields and feed through into a better housing market and improving the cost of borrowing for many companies.
However in the Eurozone companies don't always tap their bond market for their financing. They want to get it through bank. So bank lending is probably a more crucial aspect than just lowering yields and also raises the question about the moral hazard that Germany always points toward, that some other periphery countries or 'crisis economies' and whether that actually alleviates or removes some of the pressure for them to push through the very necessary economic reforms that are needed to get good economic growth in the Eurozone.
Wall: The thing is we don’t actually need the sovereign bond buying to work; we just need to think it's going to work. Isn’t that right, sentiment is everything in the Eurozone?
Craig: I think yes markets often react, especially equity markets will react to the promise of something coming, not in fact that it actually happens and that’s what you are seeing in the Eurozone at the moment. The Stoxx 600 Index for example is only less than 1% away from its peak it was in early October before we saw the sell-off. A lot of that has returned to the Eurozone as people have looked toward next year and are probably thinking well, maybe there are few factors that I think are going to expect a better economic climate than perhaps we'd have this year.
Not a great one by any means, but perhaps more stability, a weakening euro, the Eurozone Central Bank which stands ready to act, in fact of less austerity as well and the fact that some of these reforms at the country level are coming through at a very slow pace, but are starting to materialize.
In the case of Italy the Jobs Act that got passed this morning is a perfect example like how that can lead to better economic growth in the future.
Wall: So 2015 you are looking better for Europe than 2014?
Craig: I think it's looking slightly better. I think there are reasons to believe that markets are being a bit too pessimistic toward what could happen that it probably won’t just be as bad. It's not going to be stellar growth.
We are still looking to sort of less than 1% for the next year. But maybe there is enough to say we'll avoid an outright recession or avoid outright deflation. Though there is still very big risk with us, but given where markets are in Europe compared to, say the U.S., there is a lot more upside potential there.
Wall: Kerry, thank you very much.
Craig: Thanks.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
