ECB QE Monitor May 6, 2015

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1 ECB May 6, 25 The ECB started its QE on March 9. For the time being, it has completed.7% of the extended Asset Purchase Programme (APP). Key points for this month: - Eurozone yields have increased significantly mainly on long maturities. Peripheral spreads widened slightly. - Inflation expectations raised slightly but remained at low levels. - The effective euro appreciated slightly and came back to its early March levels. - Credit spreads widened slightly. - Equity indices took a break. - Loans to the private sector seems to accelerate slightly. Interest rates on new loans to SMEs continued to fall (last figures: March). - Business climate indicators continued to improve. However, consumer confidence indicators declined slightly. - The Financial Stress Index rose in the Eurozone, not in the US. Amundi Research Document for the exclusive use of professional clients, investment service providers and other financial industry professionals.

2 May 25 ECB asset purchase programme Assets bought under the APP Assets bought under the expanded Asset Purchase Programme (APP) since March bn Third Covered Bond Purchase Programme (CBPP3) 2.2 bn Asset-Backed Securities Purchase Programme (ABSPP) 95. bn Public Sector Purchase Programme (PSPP).7% % of APP implementation Assets bought under the PSPP Assets bought under the PSPP Country Holdings ( bn) Weighted average remaining maturity Germany France Italy Supranationals.4 8. Spain The Netherlands Belgium Austria Portugal Finland Ireland.5 9. Slovakia. 9.3 Slovenia Luxembourg Latvia Lithuania. 5.2 Malta. 8.5 Total Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 2

3 27/2/5 6/3/5 3/3/5 2/3/5 27/3/5 3/4/5 /4/5 7/4/5 24/4/5 /5/ May 25 Asset purchase programme: CBPP, SMP and PSPP ( bn) 2 25 CBPP3 CBPP2 CBPP 2 PSPP SMP Expanded asset purchase programme (outstanding, bn) PSPP ABSPP CBBP3 Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 3

4 May 25 FX channel Evolution of the euro (Effective exchange rate) 5 EUR/USD EUR NEER 5th June 24 EUR/USD EUR NEER Evolution of the euro vs. Since June 5, 24 Since February 27, 25 Weight in effective euro 5/6/24 6/5/25 Variation EUR/CNY % EUR/USD % EUR/GBP % EUR/JPY % EUR/CHF % EUR/PLN % EUR/CZK % EUR/SEK % EUR/KRW % EUR/HUF % EUR/DKK % EUR/RON % EUR/CAD % EUR/HKD % EUR/SGD % EUR/NOK % EUR/AUD % EUR/HRK % EUR/BGN % Effective EUR % Weight in effective euro 27/2/25 6/5/25 Variation EUR/CNY % EUR/USD % EUR/GBP % EUR/JPY % EUR/CHF % EUR/PLN % EUR/CZK % EUR/SEK % EUR/KRW % EUR/HUF % EUR/DKK % EUR/RON % EUR/CAD % EUR/HKD % EUR/SGD % EUR/NOK % EUR/AUD % EUR/HRK % EUR/BGN % Effective EUR % Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 4

5 NOK SEK RON HRK DKK BGN HUF CZK PLN AUD JPY GBP CAD SGD KRW CHF USD HKD CNY BGN DKK HRK CZK RON SEK HUF CAD AUD GBP PLN NOK SGD JPY CNY USD HKD KRW CHF May 25 Since June 5, 24 Since January st, 25 4% % -4% % -3% -8% -6% -2% -9% -6% -2% -2% -5% Interest rate channel 2Yr sovereign bonds Spain Italy France Germany 5th June Spain Italy France Germany Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 5

6 May 25 Yr sovereign bonds Spain Italy France Germany 5th June Spain Italy France Germany 2 year year 5/6/24 6/5/25 5/6/24 6/5/25 Germany France Italy Spain Netherlands Belgium Ireland / / Greece / / Portugal Austria Sovereign debt : banks holdings ( bn) 5 June 25 Germany France Italy Spain Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 6

7 May 25 Spreads channel 2Yr sovereign spreads Spain Italy France Portugal 5th June Spain Italy France Portugal Yr sovereign spreads 7 Spain Italy France Portugal 5th June 24 Greece (Rhs.) 4 25 Spain Italy France Portugal Greece (Rhs.) Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 7

8 May 25 ItraXX Indices ItraXX Main 5th June ItraXX Main 8 ItraXX CrossOver 5th June ItraXX CrossOver Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 8

9 May 25 Banking credit channel Bank loans (YoY) To non-financial corporates June 24 Germany France Italy Spain Eurozone % 5% % -5% -% -5% -2% To households June 24 Germany France Italy Spain Eurozone 8% 6% 4% 2% % -2% -4% -25% -6% Interest rates on new loans to SMEs (< million) June 24 Germany France Italy Spain Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 9

10 May 25 Wealth effect channel Equities IBEX MIB CAC 4 DAX 3 5th June 24 = 5th June IBEX MIB CAC 4 DAX 3 5th June 24 = 5th June 24 Performances Since June 5, 24 Since January st, 25 Greece Portugal Austria IBEX MIB Eurostoxx 5 CAC 4 DAX 3 Belgium Netherlands Ireland -4% -3% -2% -% % % 2% 3% Greece IBEX Belgium Eurostoxx 5 Netherlands DAX 3 CAC 4 Ireland MIB Austria Portugal -% % % 2% 3% Document for the exclusive use of professional clients, investment service providers and other financial industry professionals.

11 May 25 Inflation expectations channel Inflation expectations in the Eurozone 3 5y. break-even rate y. break-even rate Inflation swap forward 5y5y 5th June y. break-even rate y. break-even rate Inflation swap forward 5y5y Confidence channel Business climate z-score since 998 Consumer confidence 5th June 24 Germany France 5th June 24 Germany France.5 Italy Spain Italy Spain Document for the exclusive use of professional clients, investment service providers and other financial industry professionals.

12 May 25 Financial stress channel Financial stress index.5 5th June 24 US Eurozone -. US Eurozone Implied volatility 6 5th June 24 EUR m implied volatility VDAX 6 EUR m implied volatility VDAX Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 2

13 May 25 Historical volatility (2 days) on 2Yr sovereign bonds yields.8 Germany France Italy Spain 5th June 24.2 Germany France Italy Spain Historical volatility (2 days) on Yr sovereign bonds yields.6 Germany France Italy Spain 5th June 24.5 Germany France Italy Spain Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 3

14 May 25 Appendix On credibility, the announcement of QE was a resounding success. Its scale, comprehensiveness and suitability did not disappoint. The financial markets responded positively, as reflected in the fall in short and long rates and the advance of asset classes such as Eurozone equities. Implementation seems like a simple matter, at least in principle. The ECB will nonetheless be faced with the challenge of purchasing 6 billion in securities each month in illiquid markets that are short of willing sellers. QE encourages market players to buy or hold on to assets rather than selling them. Meanwhile, the banks, which are major holders of government debt, retain these assets in portfolios for regulatory purposes or simply out of liquidity considerations, as the securities can be used as collateral. Given this backdrop, unless there is an explosion in issuance by governments, a rapid change in regulators policy or forced sales by public funds (is this not what Japan demanded of public pension funds?), the ECB s drive to establish this programme will inevitably run into the realities of the market, which will undoubtedly push down short and long-term interest rates even further. Ultimately, if everything proceeds as anticipated, the Eurozone can look forward to a more growthfriendly environment. The final step for Mario Draghi involves the matter of effectiveness. We have already alluded to the importance of transmitting QE to the real economy. Several transmission channels will have to be activated in order for growth to be revived: - An exchange rate effect : any currency depreciation would contribute to competitiveness and/or help restore business margins and/or lead to natural profit growth; - An interest rate effect : any additional drop in interest rates would improve the creditworthiness of indebted entities and offer (potential) support to bank lending; - A banking credit effect ; - A spread effect : the same impact as lower interest rates; - A wealth effect : growth in the equity and real estate markets would elevate the wealth of market players, both consumers and investors; - An inflation anticipation effect : the ECB s intention is to stop the deflationary spiral, as lower prices mean lower consumption; - A confidence effect : without confidence, it will be difficult for growth to take off. This would naturally also require a consistently low level of financial stress. The outlook for the peripheral countries is not completely certain in view of negotiations, solvency challenges and elections. QE must not be overshadowed by varying political situations. NB: three important dates to have in mind - June 5, 24: Mario Draghi announces the ECB wants to expand its balance sheet to the 22 level. Negative deposit rates and the launch of a TLTRO programme are also announced. - January 22, 25: the ECB decides to launch an expanded asset purchase programme (a sovereign QE). - March 9, 25: the sovereign QE programme turns effective. The ECB starts buying sovereign bonds. Document for the exclusive use of professional clients, investment service providers and other financial industry professionals. 4

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