The European Central Bank’s recently announced stimulus measures will likely boost growth in emerging markets, further intensify the search for yield in Asia and maintain ample liquidity in the region, say finance executives.
But opinion is divided on whether the ECB will introduce quantitative easing (QE) or what effects it would have if it is.
At its June meeting, the bank cut its main policy interest rate from 0.25% to 0.15% and its deposit rate to -0.10% from 0% in a bid to incentivise banks to lend.
“It’s a very tiny negative rate, so it’s not something that is likely to be handed over by banks, at least in the private banking area," said Bernd Meyer, head of cross-asset strategy at Commerzbank. "I think there will be limited effects from that."
The central bank also introduced a targeted longer-term refinancing operations (TLTRO) scheme, enabling ECB counterparties to borrow up to 7% of their loans to eurozone non-financial sector participants.
It also said it was speeding up work on a QE programme comprising the purchase of asset-backed securities, but stopped short of releasing a launch date or scale of the scheme.
The bank also suspended the sterilisation of its Securities and Markets Programme, which Schroders’ London-based economist Azad Zangana said would add some E160 billion ($218.4 billion) of liquidity to short-term money markets.
The measures are intended to boost demand consumer demand, growth and external demand for imports, fund house Investec said last week. They are likely to strengthen emerging markets’ economic growth, it added, because EM exports are accelerating on the recovery of developed markets.
“The overall accommodative policies adopted by developed market and many emerging market central banks have been well telegraphed by the banks through this new monetary concept of forward guidance,” said Brian Baker, Asia chief executive at Pimco.
“The accommodative stance by the developed market central banks, including the ECB, has already had an effect on the Asian markets and will continue to support risk assets,” he added.
Though the new stimulus measures have had an effect on Asian markets, they are small, noted Klaus Baader, chief Asia-Pacific economist at Societe Generale.
"But the fact that Asian stock markets have nearly without exception made solid gains over the past month probably has something to do with the signals from the ECB – and also the Fed – that monetary policy in the key developed markets will remain very expansionary," he added.
"This also arguably played a role in driving bond yields lower, though connecting Asian financial market developments to euro-area monetary policy entails a good deal of speculation."
One means of transmission form Europe to Asia is the issuance of debt in the former by issuers in the latter, said Claudia Calich, M&G Investments's emerging markets debt fund manager..
“If you look at core and peripheral eurozone yields, 10-year German bonds were near 2% at the beginning of the year, but now we are down to 1%,” Calich told AsianInvestor. “Those lower rates are helping some borrowers, mostly sovereigns and to a lesser extent corporates, to issue in euros – that would be the biggest impact of the ECB easing.
"Today, I’m looking at a seven-year Indonesia deal in euros, which is a first for them. I think we are going to see the larger issuers continuing to tap the euro market.”
The rate cut, negative deposit rate and TLTRO scheme are likely to benefit Asia assets indirectly, Desmond Soon, co-head of investment management Asia ex-Japan at Western Asset. “This comes mainly via the anchoring of US bond yields and prompting eurozone investors to seek higher-yielding assets elsewhere in emerging markets."
However, the feed-through from the policies could be impeded because the ECB cannot force banks to boost lending, nor lower interest rates for households and firms, added Zangana. Also, because banks are able to access financial market funding, participation in the ECB’s TLTRO scheme could be lower than expected.
QE or not QE?
Furthermore, Zangana predicted that the QE scheme won’t be implemented until towards the end of the year.
Commerzbank’s Meyer thinks it is unlikely to be introduced at all. "The ECB has lowered its inflation forecasts and is not expecting a big recovery. It would have to see very strong disappointments compared to that to do QE,” he said. “If inflation picks up, then it’s hard for the ECB to justify QE. We think QE is more likely not to come than to come.”
Meanwhile Baker forecasts a more-than-50% chance that the ECB will be forced by the medium-term inflation outlook to embark on QE. But the knock-on effects of stimulus in Europe on investments into EM and Asian assets would be much smaller than those of US QE, he suggested.
“The Fed’s actions have the largest global repercussions because the US dollar is the reserve currency of the world and US Treasuries are the relatively least risky asset, so gets flight to quality trades,” said Baker. Moreover, if the ECB does implement QE, he added, flows into Asian debt wouldn’t rise as a result.
“I don't think QE by the ECB would affect flows into the Asian markets, but it would affect the valuation of euro bonds that have been issued by Asian issuers,” he added.
Meanwhile, Peter Eerdmans, co-head of emerging market fixed income at Investec Asset Management, told AsianInvestor that the policies’ impact on EM assets would be the continuation of ample liquidity.
“Ample liquidity, low volatility and a clear trajectory by central banks to keep monetary policy accommodative has accentuated the search for yield across global markets,” he added. “We continue to see demand for yield, and particularly for yield in Asia, whose fixed income markets offer attractive valuations and stronger fundamentals than developed markets.”
However, such periods of sub-normal volatility have not lasted more than two to three years, added Eerdmans.