Will The ECB Buy Stocks?

Debate about the ECB’s stimulus options have continued to rage, with an equity purchase plan mentioned as a possibility We think the ECB could legally buy ETFs that fit its requirements… … but it would be controversial and we question the benefits An ETF programme could total EUR 200bn, which would not be large compared to the overall QE programme …and assuming a market-weighted allocation, it would benefit the core more than the periphery… …while it is questionable whether it would have a major sustained impact on equity prices, economic growth and inflation The risk of losses is higher for equities than investment-grade credit Ultimately, we do not think that the ECB will follow other central banks and turn to buying equities via ETF purchases any time soon, if at all We consider whether the ECB will turn to equity purchases The ECB stepped up its unconventional policy around the middle of 2014, by taking its deposit rate into negative territory. Early in 2015, it launched a large-scale QE programme focused on public sector bonds. Since then it has added regional bonds and investment-grade credit bonds to the mix. Despite the positive effects on financial conditions, the outlook for growth and inflation remains disappointing. At the same time, there are market concerns that there are not enough bonds available to be bought and that current monetary policy is losing its effectiveness. This has led to questions about what else the ECB can add to its policy mix. In this research note, we consider whether the ECB will turn to equity purchases. We first look at whether equity purchases are possible from a legal and practical perspective and what such a programme could look like. We then go on to assess how effective buying equities would be in boosting equity prices, and hence growth and inflation, drawing on the experience of Japan. Finally, we look at the risks that the ECB would be exposing itself to. We do this in a Q&A format.

This post was published at Zero Hedge on Sep 30, 2016.