Is it to be QE for everyone and everywhere?

It was only yesterday that I signed off with the heat is on and indeed it was. That was true if you looked at the fall in the UK Pound or the Norwegian Krona and even more so with crude oil. In response there was an evening emergency meeting ( by telephone) of the European Central Bank. This was because it had been on the back foot in several of its bond markets in spite of its announcement of more QE ( Quantitative Easing) bond buying as recently as last Thursday. In Italy the benchmark ten-year yield approached 3% and reignited crisis fears. So let us go to the response and the emphasis is mine.

To launch a new temporary asset purchase programme of private and public sector securities to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.

We know what temporary means as for example the original emergency interest-rate cuts were supposed to be that as was the original QE and negative interest-rates. They are all still here. In a way that is the difference this time around as central bank action is supposed to be reversed a few years later when things are better but that never happened. Instead it is “More! More! More!”

This new Pandemic Emergency Purchase Programme (PEPP) will have an overall envelope of €750 billion. Purchases will be conducted until the end of 2020 and will include all the asset categories eligible under the existing asset purchase programme (APP).

Actually they highlight my temporary point because that feels like an end date but later we get this.

The Governing Council will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year.

Number-Crunching

There are various perspectives to this as assuming they started immediately which they have then there will now be around 115 billion Euros of QE bond purchases from the ECB. There was also this for Italy.

If capital key is fully respected this means almost 10.5 bln additional monthly purchases of BTPs, for the next 9 months. #BringItON  ( @gusbaratta)

As you can see Gus was enthusiastic. I do not know if he was long the market but anyway it seemed set to offer some relief to hard-pressed Italy.

There was also something that looks set to be significant but has got a little lost in the fog.

To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face.

That made me thing of the capital key point made by Gus where purchases are proportionate to each country’s share in the ECB itself, This is mostly but not entirely related to the size of their economy. So clearing the decks in case Italy for example needs more and also at the other end of the scale should they run out of bonds to buy in the Netherlands or Germany.

Also there was a plan for Greece.

A waiver of the eligibility requirements for securities issued by the Greek government will be granted for purchases under PEPP.

Rather curiously there are not that many Greek bonds to buy because they have bought so many in the past! The European Stability Mechanism has a very large holding for example.

Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt.

Market Reaction

It seems as though the ECB has steamed in this morning all guns blazing or as they put it.

At the same time, purchases under the new PEPP will be conducted in a flexible manner. This allows for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions.

This has seen the Italian bond future rally over 8 points to 138 as the ten-year yield fell to 1.7%. This is a tactical success although care is needed as only central bankers regard paying much more for something as a success. It should help Italy relax fiscal policy if it is sustained. However, there is a deeper perspective which is that some short of Italian bonds will have been screaming for the financial stretcher-bearers and may not return. Please remember that if down the road we see central bankers and their acolytes complaining of a lack of liquidity.

The situation in equity markets is not so happy because as I type this the Dax of Germany is some 1% lower although the EuroStoxx 50 is hanging onto a few points gain.

The Euro

This is off 1% versus the US Dollar at 1.083 but as we looked at yesterday we are seeing a phase of King Dollar so the picture is blurry. We maybe learn a little that the Euro has slipped against the UK Pound £ but the move is much smaller than its gain yesterday so again we learn not much. So lower yes but we have no way of knowing if the QE has contributed much here in another fail for economics 101.

On that subject someone has announced this morning that they are buying.

The SNB is intervening more strongly in the foreign exchange market to contribute to the stabilisation of
the situation. ( Swiss National Bank)

Australia

It feels like yesterday when the Reserve Bank of Australia announced it might do QE if interest-rates were cut to 0.25%. Well this morning we learnt that beds may be burning in the land of midnight oil.

A reduction in the cash rate target to 0.25 per cent.

Followed by.

A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.

This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow.

As I have pointed out earlier please remember the “market dislocations” bit should liquidity disappear and the RBA complains about it.

Poland

Earlier this week the Polish central bank joined the party.

NBP will also purchase government bonds on the secondary
market as part of the structural operations that change the long-term liquidity structure in the banking sector and contribute to maintaining the liquidity in the government bond secondary market.

Notice how they are getting a liquidity denial in early? Also they did this.

The Council decided to cut the NBP reference rate by 0.5 percentage points, i.e. to 1.00%

Bank of Korea

From Bloomberg.

The Bank of Korea plans to buy $1.2 billion in government bonds to stabilize markets

I would imagine the central banking dark web is full of messages saying “lightweights” after starting with such a small amount.

Comment

When the credit crunch started some central banks sung along with Huey Lewis and te News.

I want a new drug, one that won’t hurt my head
One that won’t make my mouth too dry
Or make my eyes too red

As time has passed more joined in and now the chorus is deafening as more join the QE party. I expect that there will be more in terms of volume for existing players and more new entrants because it is now about oiling the wheels of fiscal policy. When central banks were made “independent” this was not the purpose ( they are not that bright) but the traditional bureaucratic way of appointing people who are to coin a phrase “one of us” means that actually they are doing more than elected politicians would be allowed to. There is a democracy deficit hidden behind the crisis measures.

The picture is complex as there are many areas which badly need help right now. On a personal level in a short space of time I heard about 2 people losing jobs and a business owner losing work. But the history of central bank action is that it favours big not small business or the self employed. One certainty is that once we get any bit of stability the money will pour into the housing market as banks find that easy to do.

Meanwhile we are reminded that mistakes can be very expensive but not for our lords and masters.

Last Thursday: Lagarde says ECB is not there to close bond spreads

Tonight: ECB announces an extra 750 billion of QE to close bond spreads

 

19 thoughts on “Is it to be QE for everyone and everywhere?

  1. Shaun, thanks for keeping us up to date, things are happening so fast. It’s clear no one in the Governments or central banks is thinking about or interested in how to unwind the effects of these emergency measures.

    I agree something should be done to soften the financial impact of trade interruptions but I doubt these top down actions will reach the people who really need financial help. Somehow it’ll all end up in the pockets of the already rich and the rest of us will all become actually and relatively poorer when the resulting inflation arrives.

    • DD
      Even the rich must be losing money now especially if they haven’t taken their profits from the stock market which is going lower and lower every day.

      But as job losses increase and although the government is doing all it can to try and maintain some kind of confidence they will do all they can to prevent job losses, there are going to be job losses.

      I watched a restaurant owner being interviews by the TV a day or two ago who had already started to sell his supplies off to the public and already got rid of staff. There is only so much a small business can do to survive and some of the measures the government taking don’g go far enough.

      As the stock market falls the richer are less inclined to spend money on their homes, its like a domino effect everything starts to collapse.

      If the coronavirus does cause significant unemployment and the stock market doesn’t rebound, this is bound to have an effect on property prices I would have thought.

      As to inflation, well who says its going to take off?

      We could end up with deflation as global wealth evaporates it would become a more competitive world.

      This is only my theory, its been well versed by many an economist that word assets had ballooned beyond their realistic worth before the coronavirus and the balloon is already bursting.

      A fall in property prices worldwide could be the next collapse. Neither do I have any sympathy for all these rich people with their yachts and rollers losing any of their wealth.

      • Thanks, all good points. I hate bureacracy and I hope this crisis will force the Government to think more carefully before bringing in rules in future. They’re already having to abandon some rules to speed up decision-making, such as the number of signatories on certain forms etc.

        In my working life I’ve seen the move from typewriters to word processors to computers to electronic documents and the speed of processing has simply added layers and layers of detail and fuss and very little actual increased productivity. You can see this if you ever look at a contract written in the early 80s, just before word processing. It’ll be no longer than a few sides of typed paper whereas a similar document today will run to the best part of 100 pages. Still does the same thing, though.

  2. So the ECB launches a 750bn Euro spree and the Euro is hardly affected, contrast that with the Bank of England’s £300bn that has seen the £ drop 15% against the Euro, sorry I’m not buying it.
    Is it not an amazing coincidence that at the same time the big three UK banks have seen their share prices more than halve in just three months?, I wonder if the weakness in the UK banks share price is related to the weakness in sterling (european bank shares have seen similar falls),
    i.e a stealth devaluation to give a stealth bailout.Barclays is now trading at more than a 80% discount to book value.My rec of Barclays at 84p not doing too well, currently 76p.

    Mervyn King did a stealth devaluation of about 30% in 2008 to bail the banks out, is this another?

    https://ycharts.com/companies/BCS/price_to_book_value

    • Hi Kevin

      The Bank of England stepped up to the plate in the afternoon by announcing another £200 billion of QE and an interest-rate cut of 0.15% to 0.1% So in the latter case they finally got around to the move they intended for November 2016. They also kindly confirmed my view that Governor Bailey would reward the government for appointing him by cutting interest-rates.

      As to the banks I have been regularly tweeting to ask if Sir Alistair Darling is still “confident” the UK taxpayer will get their ~£5 back. At the present £1.22 that looks like we are a long long way from home to coin a phrase.

    • Cheers Kevin as it raised a smile because this is extraordinary.

      “TOKYO (MNI) – Unrealized losses on ETFs (exchange traded-funds) held by the Bank of Japan are about JPY2 trillion to JPY3 trillion, Governor Haruhiko Kuroda said Wednesday.

      However, Kuroda said that the unrealized losses are a rough estimation, as they fluctuate sharply day-by-day.”

      He must be able to give a date and a specific amount which makes me wonder why he is avoiding that.

  3. Hi Shaun
    Now that we have 0.1% IR, clearly a
    concerted effort from all the CBers
    where is the glimmer of logical light
    that if rates are raised then money
    flows in coming from?
    Maybe TPTB see that Ponzi/UBI
    is their only way to bail out,yet again!
    JRH

  4. Good to see another fan of The Oils, as they often had a pop at the decision-makers. Would recommend Jean-Michel Jarre, but he doesn’t use many words!

    Quelle surprise that my comment about a review of the King/Kay book wasn’t published as I asked why King didn’t raise rates in 05 when many of us predicted the coming crash. Quelle quelle surprise that the BoE has cut rates to zero as the “emergency” continues. It is a tough one to call on what will happen when the flu has gone in two months (Wuhan has had no new cases for a few days already). I am inclined to agree with Shaun that the panics around shares, commodities etc. will see much of this money heading into property (anyone else note how it was available for “business” much like the other “business lending” wheezes this govt has dreamt up). However, there is the question of availability of credit (as I said the other day, this is the key when the cost is very low), given the growing risks of default, temporarily covered up by mortgage holidays and maybe a grand in the post. Indeed, people may have learned the lesson about asset prices and may just sit tight and not borrow. There is supposed to be an 18 year great circle when the lessons have to be relearned (02- height of the dot.bomb bubble).

    Oh well, time I did that MBA unit in Practical History of the Financial Markets, especially that chapter on Behavioural finance. Weekends will be quiet, so I can relive my teenage fantasies about Sally Knyvette by watching all of Blake’s 7 again. Sadly I am probably too old now for some advice from Jarvis Cocker:

    “And then dance and drink and screw
    Because there’s nothing else to do”.

    • Hi Dave

      It was Glynis Barber for me although she only appeared about half way through Blakes 7. She played Soolin and Sally was Callie was she not?

      As to business lending you may enjoy the tweet I was sent earlier.

      • Sally was Jenna in high boots and some nice clobber. I knew a number of blokes, who were into Servelan in a big way – she used to get a lot of dominatrix fan mail!

        I have just had a note from Lloyds about my account. I expect that it will say overdraft rates are up to about 40% – a clear sign of growing nervousness, which will reduce the take-up of credit.

  5. Looks to me like some kind of Helicopter money on the way after watching question time tonight, but all the government have done so far is made loans available. The Chancellor is to make more announcements tomorrow.

    As for the reduction in interest rates from 0.25% to 0.10% it depends how much one is borrowed “every little helps” !

    Its possible the rates could go to zero or even negative interest rates and I know many disagree with those measures.

    However when assets are being unwound.sold off the money has to go somewhere and if it means negative interest rates penalize the very wealthy to prevent the poor being penalized further I am not against that.

    I said a few weeks ago that the current situation far worse than the financial crisis in 2008 and it looks to me like that is panning out.

    This is now a global crisis of mammoth proportions and no one knows where it will end. I just hope all these rich and wealth people are prevented from hiding their ill gotten gains.

    • Hi Peter

      I have been scanning the skies above Battersea for signs of RAF Chinooks and Merlins but do not recall seeing one today. Perhaps they are in maintenance for the big event…

      As to business borrowing rates you may enjoy my reply to Dave as the business owner there was only offered a loan at 17.9% above the new Bank Rate

      • He should borrow and get into buytolet …. banks will be falling over themselves to lend closer to 2.5% fixed for a decade.

  6. Hi Shaun,
    So 0.1%. Does that indicate the next move in rates will be up?
    But I wonder when that will be. I notice the Govnr. of the RBNZ confidently stated the new record low rate of 0.25% will stay for the next 12 months. But no indication on whether the next move will be up or down. Perhaps he thought that was enough forward guidance for one day.

    That reminds me of a tip a Sales & Marketing Director gave me many years ago on the fine art of sales forecasting –
    Give ‘em a number or give ‘em a date, but never give both together.

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