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.
Hello.
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?
Yes, we've had a Minister from the ECB come out and talk about the fact that perhaps sovereign
bond buying might come a little bit earlier than perhaps Mario Draghi is letting on. There
is definite movement and shift towards 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 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, 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.
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.
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 it had 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 U.K. 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 towards, 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.
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?
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 towards 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 materialise. 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.
So 2015 you are looking better for Europe than 2014?
I think it's looking slightly better. I think there are reasons to believe that markets
are being a bit too pessimistic towards 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.
Kerry, thank you very much.
Thanks.
This is Emma Wall for Morningstar. Thank you for watching.