After months and months of speculation and debate, the European Central Bank (ECB) officially announced this morning that it will expand its QE, asset purchasing program. Mario Draghi, the head of the ECB announced this morning that the central bank will purchase 60 Billion Euros worth of assets each month until September 2016. The main target of the asset purchases will be focused on government bonds, government agencies, and large European corporations.
ECB’s reasons behind QE expansion
The ECB has said the reasoning for the expanded QE, asset purchase program is due to evidence of deflation around Europe, fall oil prices, uneven economic recoveries around Europe, and unstable labor markets around the Eurozone. Draghi said that it still may take a couple years to get inflation back on track to the 2% mark that is widely anticipated for Europe, hence the need for an extended asset purchase plan.
As of this writing, the Euro is down -201 pips or -1.73% compared to the US dollar and the Euro/Japanese Yen pair is also down extensively by -250 pips or -1.83%. Meanwhile, stock markets around the world are rallying on the news. The FTSE is up 77 points, CAC is up 83 points, the DAX is rallying 147 points, and the Stoxx 50 is up 61 points. The Dow is up 104 points in the US and the Japanese Nikkei is up 49.
ECB QE program to aid the extension in the bull market in equities
The news is extremely bearish for the Euro currency, as it is a flood of capital into the markets and essentially devaluing the currency. On the equity side, it is viewed as very bullish as it an announcement that a big buyer is entering the markets and aiding liquidity. This comes after the US Federal Reserve just in the past several months ended its own QE program and certainly was disappointing to traders who were used to the added liquidity and volatility in the markets. However, it appears that Draghi and the rest of the ECB will not only help prop up Europe and several of its struggling members, but the new QE program will also help aid the extension in the bull market in equities worldwide, at least in theory.
Unfortunately, there is still the matter of the Greek vote, which will take place this Sunday, January 25th, which will decide whether Greece will stay in the European Union or exit on its own. While many people believe there is a very limited chance of a Greek exit of the EU, the possibility is there and support within Greece to exit certainly has gained steam since the issue was risen a couple years back. Should the vote conclude that Greece will exit the EU, not only will the Euro take a massive hit, but it is widely seen as having serious consequences to equities and the world economy as a whole. Even American investment banks are rolling out safety plans to protect themselves in case of a Greek exit. However, for now, the markets will ride the wave of extended asset purchases.