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European version of QE doesn’t disappoint

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Dawn Kendall, Investec Wealth & Investment, comments on the ECB’s quantitative easing programme… 

Mario Draghi announced the European version of QE and it did not disappoint. Rather than provide a mealy mouthed effort, after a year of planning the ECB has delivered a program that should now define the shape of the European project for an extended period of time. With Germanic attention to detail, this plan has been engineered to within an inch of its life. Now, all eyes will be on the execution. Unlike the UK, US and Japan, the European Union is not homogeneous. In recent weeks, the big question overhanging the market was over risk-sharing and mutualisation. These issues have been addressed clearly and are universally positive.
 
The Q&A session after the announcement was illuminating as Draghi was clear that these market operations will be open-ended and not the final solution. So, if we arrive at September 2016 and it has not worked, expect more. He accentuated the fact that bonds are fungible due to currency harmonisation and that the system would be mutually supportive. He was also explicit in this expectation that banks should begin lending to businesses and consumers. With negative ECB deposit rates, there is a very positive incentive for banks to find other uses for the money. Whether European banks and investors will choose to invest in home assets or convert the funding into USD and invest in US real assets is a moot point for the coming weeks and months.
 
Immediate market reaction has been positive but it will take a longer period of time to observe exactly how the transmission mechanism of cash from the ECB to banks to consumer will develop. From an economic perspective, future European M3 numbers will give us the clearest indication of the extent of success in putting the cash to work

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