Would ECB Buying Equities Really Be a Good Idea?
Would ECB Buying Equities Really Be a Good Idea?
(Bloomberg) --
Just when the market is looking for a positive catalyst to revive its rally, the European Central Bank’s Olli Rehn seems to think it’s a good move to float the idea of equity purchases as a means of stimulus. But a number of investors and strategists aren’t too thrilled and warn of the risk of artificially overvalued assets.
In an interview with the Wall Street Journal last week, Rehn said that it was better for the ECB to overshoot than undershoot market expectations when it comes to new support measures, and didn’t rule out adding equities to the central bank’s stimulus program.
“I hope the ECB won’t start buying stocks,” said Roelof Salomons, chief strategist at Kempen Capital Management. “Buying stocks is great for investors but it won’t move the needle -- it will create a bubble instead. The ECB has already made a mistake with bond purchases."
The rationale behind possible stock purchases is to stimulate household consumption and help European companies raise capital at higher prices to finance investment, according to Laurent Douillet, a Bloomberg Intelligence strategist. Yet, simply buying equities won’t push European firms to boost their capex plans, says Kempen’s Salomons. For that to happen, countries like France and Italy need to implement reforms while Germany needs to increase government spending, he says.
If the ECB were to start buying stocks, it wouldn’t be the first central bank to engage in such extraordinary measure. The Bank of Japan has been buying exchange-traded funds since 2010 and now dominates the nation’s ETF industry, spurring concerns among money managers about an equity overhang.
“I am a bit skeptical,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg in Frankfurt. “Equity buying by a central bank has not worked in Japan. And for the euro zone, the wealth effect should be quite limited."
At last July’s meeting, ECB policy makers committed to review a swathe of options including interest-rate cuts and renewed quantitative easing. Meanwhile, European equity funds have seen almost non-stop outflows since March 2018, having lost about $87 billion this year alone, according to Bank of America and EPFR Global.
While Rehn may be considering launching stock purchases, the majority of the ECB’s governing council would oppose such a move, says Peter Schaffrik, a global macro strategist at RBC Capital Markets. “I am at this stage not even really thinking about the risks of this scenario as I just don’t think this is a realistic option, it’s a red herring."
However, it’s important to note that many strategists and investors had also doubted that the ECB would ever start its 2.6 trillion-euro ($2.9 trillion) bond-buying program to stimulate growth.
And some support such a move. Rick Rieder, BlackRock’s chief investment officer for global fixed income, said in April that the ECB should consider buying stocks as a form of additional stimulus as debt costs in Europe are much lower and equity is “too expensive.”
“It’s a conflict between investors and economists,” says Kempen’s Salomons. “Markets love shorter-term gains even if those come with long-term concerns. You don’t want to be in the ECB’s shoes.”
In the meantime, Euro Stoxx 50 futures are up 0.5% ahead of the open, while S&P 500 futures are rising 0.6%.
- Watch German stocks after the government hinted that the country could add about 50 billion euros of spending, putting a number on the possible stimulus for the first time while also indicating nothing was imminent on that front.
- Watch Italian equities ahead of a confidence vote in the government on Tuesday. The League and Five Star appear to be beyond healing, with the latter moving to distance itself from Deputy Prime Minister and League leader Matteo Salvini.
- Watch trade-sensitive stocks as the rollercoaster that is keeping up with the state of U.S.-China trade talks begins with a degree of positivity. U.S. President Donald Trump tweeted his team is “doing very well with China, and talking!”
COMMENT:
- “Investors have fled equities in favor of bond and money market funds at a record rate this year,” Bernstein strategists write in a note. “This low level of investor sentiment provides a cushion for the market so we are not bearish despite worsening macro data. At the very least, this makes this August very different from the last Chinese devaluation of August 2015 when investors had been buying in the prior six months.”
NOTES FROM THE SELL SIDE:
- Jefferies says EON’s earnings outlook continues to appear subdued, although these challenges are now better understood by the market. Broker lifts rating to hold from underperform.
- Citi raises X5 Retail to buy, and sees co. delivering growth in an environment where growth is becoming more rare. Says “conservatively” models 7.6% Ebitda margin this year, up from previous 7.3%.
- The U.K. buy-to-let market remains in “decent health” and there’s significant upside for the likes of Charter Court, OneSavings Bank and Paragon Banking, Peel Hunt writes in a note boosting price targets on all three firms. Paragon (buy, PT 580p) is top pick, Charter Court kept at buy (PT 400p), OneSavings also buy (PT 470p).
- Morgan Stanley initiates Colruyt at equal-weight, seeing free cash generation as able to provide some support to the shares even if risk/reward remains skewed toward the downside.
COMPANY NEWS AND M&A:
- DSV Completes Acquisition of Panalpina; Sees DKK2,200M Synergies
- Dassault Systemes Says Medidata Stockholders Approve Purchase
- Grand City Properties 1H FFO Up 7%; Confirms 2019 Guidance
- Bpost CEO Van Gerven to Leave Co. in Feb.: De Standaard
- Lundin Norway Makes Small Oil Find South of Edvard Grieg: NPD
- Mitie Set to Sell Stake in Gather & Gather in GBP90M Deal: Sky
- Vapiano CEO Everke to Resign From Office Effective Aug. 31
TECHNICAL OUTLOOK for Stoxx 600 index:
- Resistance at 370.8 (200-DMA); 374.5 (61.8% Fibo); ~386 (uptrend); 395.1 (July high)
- Support at 365.5 (50% Fibo, May low); 356.5 (38.2% Fibo)
- RSI: 39.2
TECHNICAL OUTLOOK for Euro Stoxx 50 index:
- Resistance at ~3,400 (uptrend) 3,403 (61.8% Fibo); 3,444 (50-DMA)
- Support at 3,249 (June/August low); 3,300 (200-DMA)
- RSI: 41.5
MAIN RESEARCH AND RATING CHANGES:
UPGRADES:
- CNH Industrial upgraded to overweight at Morgan Stanley
- EON upgraded to hold at Jefferies; PT 7.80 Euros
- Humana upgraded to buy at ABG; PT 55 Kronor
- Novozymes raised to neutral at JPMorgan; Price Target 275 Kroner
- Ratos upgraded to hold at SEB Equities; PT 18 Kronor
- Scout24 Upgraded to Buy at Kepler Cheuvreux; PT 57.50 Euros
- X5 Retail GDRs upgraded to buy at Citi
DOWNGRADES:
- Paragon GmbH & Co KGaA cut to hold at Bankhaus Lampe
- Technogym downgraded to hold at Berenberg
INITIATIONS:
- Colruyt rated new equal-weight at Morgan Stanley; PT 43.40 Euros
MARKETS:
- MSCI Asia Pacific up 0.4%, Nikkei 225 up 0.8%
- S&P 500 up 1.4%, Dow up 1.2%, Nasdaq up 1.7%
- Euro down 0.01% at $1.1089
- Dollar Index up 0.08% at 98.22
- Yen down 0.01% at 106.39
- Brent up 1.2% at $59.3/bbl, WTI up 1% to $55.4/bbl
- LME 3m Copper up 0.3% at $5763/MT
- Gold spot down 0.5% at $1506/oz
- US 10Yr yield up 3bps at 1.58%
ECONOMIC DATA (All times CET):
- 10am: (IT) June Current Account Balance, prior 2.6b
- 10am: (EC) June ECB Current Account SA, prior 29.7b
- 11am: (EC) July CPI Core YoY, est. 0.9%, prior 0.9%
- 11am: (EC) July CPI MoM, est. -0.4%, prior 0.2%
- 11am: (EC) July CPI YoY, est. 1.1%, prior 1.3%
--With assistance from Michael Msika.
To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net
To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Jon Menon
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