Union International: After years of promising, the European Central Bank has finally begun open-ended purchases of sovereign debt.
Union International: The European Central Bank and its President, Mario Draghi, have finally delivered on the promise of the “big bazooka” to tackle the issue of low growth and the threat of deflation in the Euro zone. The central bank made the first of its €60 billion monthly purchases last Thursday after numerous programs aimed at adding liquidity to bank balance sheets since 2010 failed to have the desired effect.
Union International says that while the program is unlikely to have a sustainable effect on Europe’s economic growth issues, it will almost certainly result in huge tailwinds for European stock markets, a prediction it cites in its latest investor bulletin.
“We think stocks in Italy, Germany and France are set to rise steadily over the duration of the quantitative easing program although the jury is still out on how it will positively impact the real economy,” said Solomon Roth, chief economist at Union International.
“Politicians will always take the path they think will cause less discomfort but what Europe really needs structural reform in investment and labor to help drive growth and competition,” said Roth.
The firm advised clients that the ECB’s program would once again result in a mispricing of risk when it comes to lending money to sovereign governments.
“Lending to Germany is not the same as lending to Spain and while there is clearly a difference in their bond yields, we don’t think it’s wide enough and, the longer the ECB’s program runs, the narrower that gap is likely to get,” concluded Roth.
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