Friday, it seems, comes around quicker and quicker every week. Am I getting old or am I simply enjoying myself far too much? Who knows; what we do know is it’s time for this week’s ‘News, Views and Truths’.
So, we had some rather big news this week surrounding the European Central Bank, which I commented on a few weeks ago in a previous edition of this blog…
As I wrote, ‘in this post-financial crisis world where Central Banks will do “whatever it takes”, there is a great likelihood that this economic slowdown will be a catalyst for them to step in. And by that, I mean print money, just like they did in every year following the 2008 credit crisis. And printing money creates massive amounts of liquidity which creates a positive environment for risk assets. Which increases investors returns. So, watch out for the headlines in coming weeks when the ECB announces a re-introduction of their Quantitative Easing programme.’
Well, here we are people. Yesterday the ECB announced that it will commence a new round of cheap loans to banks, promising to keep interest rates at record lows for longer, due to their concerns regarding weakening Eurozone economies.
Known as targeted longer-term refinancing operations (TLTRO), this is viewed as the first step towards full blown Quantitative Easing (QE), where the Central Bank directly purchases bonds from the market, acting as a permanent demand mechanism for everything, good, bad and absolutely shockingly terrible.
However, the ECB’s main focus on this initial step is to increase lending into the economy and the view currently is that whereas QE would have an almost immediate downward effect on yield, this does not necessarily transfer itself to increased lending from the banks.
The refinancing operations require borrowers (banks) to approach the ECB to take advantage of very low rates, which means the operations are more directly targeted at improving lending to the real economy. Banks with decent net lending figures will be able to borrow funds from the ECB at rates as low as -0.40%, enabling them to use the proceeds to lend out at higher rates and thus provide both stability and stimulus to the economy.
Naturally, the support is viewed as being positive by markets; bank shares have bounced nicely as is expected. However, if the national economies in question do not show signs of improvement in the short term, then more drastic measures will come into play. Full blown QE is still on the cards – even more so after this announcement. And that is very positive for investors’ returns.
Again, watch this space.
And to finish, a playlist by our Wilma Watson – see if you can spot the theme. Have a greater weekend and I shall see you next week.