Thursday saw the ECB announce QE of €1.1 trillion; the euro fell to 1.13 and stocks elevated globally.
In an attempt to combat deflation in the Eurozone, Marios Draghi, president of the ECB, has compiled an asset purchase programme which will allow the European central banks to buy private and public bonds to the tune of €60 billion every month until the end of 2016; a total of €1.1 trillion, or double what the markets were expecting and had priced into the already low euro and recent boost in stocks.
The ECB are following the example of America, however the U.S. ordered quantitative easing based on a bond yield of 4% rather than the significantly lesser-valued European bonds, less than 0.75 per cent in Germany and France, and 1 percentage point higher for Italy and Spain, hence the critics are questioning the worth of the bond-buying scheme.
But structural reform has to happen as deflation hit the Eurozone and this plan is seen to be able to raise the inflation rate in the medium term of two years to just under the 2% mark, or at least until the ECB sees “a sustained adjustment in the path of inflation.”
The plan is to allow central banks around Europe to take the risk from the bond purchases, but as money floods into the banks, they will lend more, businesses are able to expand, employ more people, take the strain from governments’ benefit budgets, and stimulate the economy through higher production and consumer spending….that’s the plan.
In the meantime, markets round the world gave an immediate reaction of a rise in stocks and on indices as investors see businesses benefitting from the influx of cash.
Germany30 [DAX] opened on Thursday at 10326.50, closing at 10504.25
France 40 [CAX] opened at 4492.75, closing at 4595.00
USTECH100 [Nasdaq] opened at 4181.38, closing at 4261.88
Japan 225 [Nikkei] opened at 17337.5, closing at 17562.5
UK100 [FTSE100] opened at 6678.00, closing at 6773.75
The euro, however, saw its lowest level against the US dollar since 2003, falling from its opening at 1.16129 to closing at 1.13453.
Angela Merkel, Germany’s Chancellor and premier of Europe’s strongest economy, did not criticize the QE scheme instead she was vehement that the ECB decision was totally independent and emphasized that, “No matter what decision the ECB should take, we should not, as politicians, be diverted from putting in place the necessary conditions for recovery.” Pushing an austerity-based recovery has always been Merkel’s dictate but she will be fighting a battle not only with central banks’ policies but also in the political arena as Greece faces elections on 25 January and may vote in the left-wing Syriza party that is against austerity measures in the Hellenic state.
MT4 chart: EURUSD
MT4 chart: Germany30
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