While the yen and the Nikkei are marking time waiting for more stimulus from the BOJ, eurozone bond yields are plunging, especially in the peripheral countries, on expectations that the ECB soon will counter mounting deflationary forces by providing another round of monetary stimulus. The Italian and Spanish 10-Year government bond yields are down by about 100bps since late last year to 3.2%. The French yield is down to 2.0%, while the German yield is at 1.5%. Even the Greek bond yield is down to 6.1%.
In his 4/3 press conference, ECB President Mario Draghi raised those easing expectations when he said:
"The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation.” During the Q&A session, he explained: “So this statement says that all instruments that fall within the mandate, including QE, are intended to be part of this statement. During the discussion we had today, there was indeed a discussion of QE. It was not neglected in the course of what was actually a very rich and ample discussion.”
On Friday, Reuters reported that according to The Frankfurter Allgemeine Zeitung, the ECB “has modelled the economic effects of buying 1 trillion euros” as part of a QE program, estimating that it would add 0.2-0.8 percentage points to inflation. Frankly, that seems like very little bang for some much additional liquidity. Furthermore, it was also reported that “an unnamed senior central banker was extremely concerned about possible market distortions that could result from such an intervention, and feared such purchases could create a bubble in the corporate bond market.” There certainly seems to be a bubble in peripheral bonds already.
Meanwhile, the EMU MSCI stock price index (in dollars) is up 3.0% ytd, outperforming the All Country World MSCI’s 0.8% increase. On a year-to-date basis, the eurozone’s peripheral stock markets have been leading the charge: Italy (15.8%), Ireland (15.3), Greece (14.9), Portugal (9.1), Spain (7.3), France (3.4), Belgium (2.7), Netherlands (0.6), and Germany (-1.3).
Today's Morning Briefing: Momentum Meltdown. (1) Too close to the sun. (2) The macro picture still looks bright. (3) Blame it on Waxman, Hough, and Lewis. (4) Lots of candy getting crushed. (5) A happy spin: Internal correction should increase longevity of bull. (6) BOJ’s QQE losing its bullish touch. (7) Abe isn’t Reagan. (8) Draghi getting set to walk the talk, and actually do something. (9) Stay Home, but Go Europe for a while longer. (10) Focus on overweight-rated S&P 500 Transportation.
