ECB announces covered bond purchases

ECB announces covered bond purchases

By: Oliver Miller | Where To Trade | On:28-10-2014 10:49
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Key Highlights

  • ECB buys 1.7 billion worth of covered bond purchases
  • Figure well within market estimates
  • More needs to be done

 

The ECB

The markets were yesterday eagerly waiting for the announcement from the ECB about the amount of covered bond purchases that the bank had begun with. The EURUSD showed a spike in volatility a few minutes pending the release but later resorted to normal volatility levels. The release disclosed that the ECB bought 1.704 billion Euros about (2.2 billion) USD worth of covered interest bonds since it announced its decision to do so last week on the 20th October this year.

1.704 million is well within the estimates of the market analysts and so the market had already priced it in. The EURUSD only had a 400 point spike to the up side an hour from the announcement of the release which saw an almost immediate reversal on of most of the gains. This spike to the upside would suggest that the market had anticipated a slightly higher figure than the one 1.7 billion. However it is our view that this figure was widely within the larger markets anticipation.

This latest covered bond purchase program is another non-conventional tool that the ECB has opted to use in order to stimulate the struggling Euro zone economy. The inflation rate in Europe, at 0.4%, is well below the 2.0% targets whilst data form the euro zone indicates that the area will continue to have a sluggish or near negative economic growth rate should the economic conditions persist.

 

More needs to be done

Despite the verbal commitments by Mario Draghi, president of the European Central Bank the economy continues on its rocky path and the threat of a technical recession is constantly on the horizon for the 18 members economic block. Germany, the industrial muscle of Europe, posted a 0.2% contraction of its economy this month whilst Italy, the third largest economy on the Euro zone, has been in a recession for two years.

 

Where To Trade - german and Itallian growth rate

 

There are wide spread views within the Euro zone that more needs to be done and that more can be done to stimulate growth. Whilst speaking in a conference in Washington, Draghi said that the risk of doing too little outweighed the risk of doing too much. This underscores the views of the majority of the other countries in the Euro zone with the notable exclusion of Germany. Germans are fundamentally opposed to the idea of a loose monetary stance. Jens Weidmann, the Bundesbank president has expressed his opposition to the proposal to expand the scope of operations of the ECB stimuli to include the purchase of sovereign debts. But the question that still looms is; without this option, can the ECB revive the European economy?

 

Looking Ahead

Luc Coene the Belgian central bank governor wants to assess the current measure taken by the ECB before considering the taking of other options. Several other influential policy makers take this view and this leaves Draghi almost unsupported with his calls for more immediate stimuli arrangements. On a balance of probabilities, we are not likely to see the ECB take any additional measure to stimulate the economy for the next six months.

Keeping that in mind, the composition of lax monetary policy, a sluggish economy and a range of monetary easing operations is a perfect recipe for steady decline of the Euro. Under these conditions a great approach is to maintain our long term short bias on the Euro.

Oliver Miller

Oliver Miller

"Patience is the key for success"

Oliver Miller is one of the best financial analyst with 18 years of online trading experience

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