Following a Mario Draghi speech at the Jackson Hole conference, don’t be surprised to see quantitative easing (QE) across Europe, a recent research note from Barclays points out. The real issue will be the resulting impact on global markets.

ECB QE

ECB to lead markets incrementally pricing in QE

While the announcement is not official, the report, titled “QE Questions… and Answers,” said the ECB central bank rhetoric could lead to markets incrementally pricing in QE well before the actual implementation.

ECB QE

The Barclays report considered the impact of ECB QE on a number of markets, using the US and Japan as a guide.

Impact in the stock market would be dependent on the size of the program and the assets purchased, the report noted. As details are fuzzy, the report noted that in the US and Japan stocks outperformed bonds.  In the US, at times, the continued rise in stock market valuations defied fundamental analysis. Domestic stocks outperformed bonds as well as global stock markets.  “We would expect a similar outcome in the euro area equities too, particularly in light of their recent underperformance,” the report predicted.

ECB QE

Heave sell-off in bond market in the wake of QE

The bond market in the wake of quantitative easing sold off despite heavy US Federal Reserve purchases during QE2 and QE3.  A similar result was noted in Japan. The report pointed out that while real yields declined through periods of quantative easing, inflation expectations also increased. This points to a major stock sector pick in Europe if similar patterns hold true.  “From a stock market perspective, it could imply outperformance for value stocks versus growth,” the report said.

ECB QE

When considering the currency markets, the report suggested that the euro currency could experience depreciation.

In related news, the US dollar is climbing to new heights against the Euro and a basket of currencies as quantitative easing is likely to have the impact of reducing the value of the currency in which the quantitative easing takes place.  Separate analysis indicates this impact is less significant on the US dollar due to the fact it is the reserve currency of choice.

ECB QE

QE: Consumer confidence rises

As a result of quantitative easing, as economic data improved, so, too did consumer confidence yet inflation numbers also picked up in the US and Japan, the report noted, as it took a closer look at stock sectors that might benefit.

ECB QE

Under a QE regiment, consumer discretionary and industrials outperformed in the US while in Japan domestically orientated financials and internationally focused autos outperformed – despite currency weakness. With this in mind, the Barclays report noted that peripheral European equities and financials may be the greatest beneficiaries.

The report reiterated its underweight in the staples and healthcare segments and overweight in European financials, materials and industrials.

ECB QE