Fed heads one way, BoJ the other. What now for ECB?

November 3, 2014


After the Federal Reserve wound up its bond-buying programme, as expected, and the Bank of Japan sprung a surprise by sharply increasing the pace of its money-printing, this week the European Central Bank takes its monthly bow and will probably come up with nothing new.

Over the past week there have been some glimmers of hope for the euro zone. European bank stress tests came up with a largely clean bill of health, though whether the demand is there for more credit remains to be seen.

Inflation edged up for the first time in many months. It might have only gone from 0.3 percent to 0.4 but that was against a backdrop of tumbling energy prices which could have pushed the headline figure yet lower.

Much of the evaporation of business confidence has been due to events in and around Ukraine and now a deal, brokered by the European Union, has been struck whereby Moscow will resume supplies of gas to its neighbour over the winter in return for payments funded in part by Kiev’s Western creditors. That eases concerns that a new “gas war” could disrupt winter supplies of energy to EU states.

But these are skeletal green shoots. Today, manufacturing PMI surveys across the euro zone are expected to show factory activity is barely growing but there is little prospect of the ECB adding to its arsenal of measures until a second round of cheap loans to banks – given on the basis that they lend on into the economy – are offered in December.

Take-up at the first round in September was poor but that was before the stress tests were complete.

There is a good chance that the “TLTRO”, together with purchases of bundled-up asset backed securities (starting later this month) and covered bonds (which have begun with a whimper), won’t prove sufficient to jolt the euro economy into life.

The next move, as reported in a recent Reuters exclusive – http://reut.rs/1w7iBMD – could be to buy corporate bonds with full-on QE only hoving into view next year if all else fails. And that will depend on Draghi’s ability to win over or overcome internal opposition on the ECB Governing Council.

Do read if you haven’t already our laying bare of the breakdown of relations between Mario Draghi and Bundesbank chief Jens Weidmann which puts a question mark over the ECB’s ability to act more forcefully. http://reut.rs/1woat7R

ECB data on its second week of covered bond purchases will be issued later today.

There is also the question of the impact of QE given euro zone borrowing costs are already so low. It would presumably push the euro yet lower – as the Bank of Japan’s latest gambit will surely do with the yen – but unless euro zone companies can pass on higher imported input costs on to consumers, a huge if, there won’t be much upward impact on inflation though cheaper exports could help growth a little.

Furthermore, the BoJ’s shock move is likely to see the yen fall against the euro, so any devaluation for the currency bloc will be piecemeal. Tokyo has also served to keep financial markets awash with liquidity for longer, despite the Fed leaving the party.
As our Anatole Kaletsky put it this weekend, Keynes was right — http://reut.rs/1sRhdq5

Only greater government spending – particularly on public works and infrastructure – is likely to have a direct economic impact in this sort of depressed environment.

All the monetary policy measures are like pushing on a piece of string while demand remains so low yet the country with the current account surplus to spend more – Germany – will not yet entertain that argument.

Unsurprisingly, with economies struggling the politics of Europe are extremely fluid. An opinion poll on Sunday showed fledgling Podemos has become a major force in Spain a year before national elections and only 10 months after it was formed.

The poll showed that if an election was held today, the anti-establishment “We Can” movement would win 27.7 percent of the vote, just ahead of the opposition Socialist Party with the ruling PP trailing third on 20.7 percent, and that in a country which is showing some signs of turning a corner.

Italy’s Matteo Renzi is popular but his reform programme is struggling, Francois Hollande remains the most unpopular French president anyone can remember with the far-right National Front capitalizing.

Of most immediate concern to the euro zone, Greece’s coalition government could be toppled by left-wing Syriza if early elections are forced next year. Only Germany’s Angela Merkel looks serene, which makes Berlin’s unwillingness to shift economic tack all the more significant.

Britain shows that even a robust economic recovery is not necessarily a winning card. Anti-EU UKIP is poised to snatch a second parliamentary seat off the ruling Conservatives at a by-election later this month and, much more potently, could lure millions of previously Conservative voters at next May’s general election.

Yet the opposition Labour party, with support collapsing in its Scottish strongholds and with a leader surrounded by question marks and few answers, seems in poor shape to capitalize. Nonetheless, UKIP drags Prime Minister David Cameron into positions that could quite conceivably see Britain eventually leave the EU, even though he insists that is not his intention.

Der Spiegel reported on Sunday that Merkel warned Cameron that putting limits on immigration from other European Union nations would be a “point of no return” that could sharply increase the risk of Britain leaving the EU. “Still think you can renegotiate, Mr Cameron?” UKIP leader Nigel Farage tweeted in response.

Just because a gas deal has been signed doesn’t mean the Ukraine crisis is waning. Pro-Russian rebels elected a separatist leadership in eastern Ukraine on Sunday in a vote the United States and EU had already denounced as illegitimate and which is sure to stoke tensions between the West and Russia.

Kiev called on Russia not to recognize the election but Moscow said it respected the will of the people of south-east Ukraine.
Iraqi Kurdish fighters have joined the fight against Islamic State militants in Kobani, hoping their support for fellow Kurds backed by U.S.-led air strikes will keep the ultra-hardline group from seizing the Syrian border town. The arrival of 150 Iraqi peshmerga fighters marks the first time Turkey has allowed troops from outside Syria to reinforce Syrian Kurds, who have been defending Kobani for more than 40 days.

Islamic State’s sphere of influence is as wide as its bloodlust is deep. The Iraqi government said  the militants killed 322 members of an Iraqi tribe in western Anbar province, including dozens of women and children whose bodies were dumped in a well.

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