Stocks extend rally as ECB meets

There is the sensation that a surprise announcement could hit the headlines today, as the European Central Bank (ECB) meets in Frankfurt.

The ECB is expected to leave its interest rate policy unchanged, yet to hint at the future of its Quantitative Easing (QE) program, which is due to end in March 2017.

Again, market expectations are big, yet blurred. Regarding the future of the ECB’s asset purchases program, markets have been given free rein to their imagination on what could be the next step.

It is clear that the ECB would have a hard time carrying on with its monthly 80 billion euros worth of bond purchases, given that the pool of eligible assets has been drying up at a dangerous speed. If the ECB wants to stick with its 80 billion euro worth of purchases, it will need to change the rules of the game. Mr Draghi could opt for a significant modification in its portfolio allocation, which could potentially involve broader corporate bond purchases, a change in capital ratio, or simply expanding the purchases to new asset classes.

There are also talks of a potential tapering plan, which would include a combination of a monthly 60 billion worth asset purchases and a six-month expansion, or more.

Finally, we equally consider the possibility of a major shift from a Quantitative Easing to a ‘Qualitative Easing’ following in the footsteps of the Bank of Japan (BoJ).

In this perspective, the ECB could also prefer adopting a similar strategy to the BoJ, that would provide it with a greater intimacy, hence a broader power of action in term.

Such ‘Qualitative Easing’ would also have the advantage of smoothing the yields, hence controlling the spread between the underlying sovereign yield curves.

Global stock rally continues

Despite the strongly overbought market conditions, the global stock rally continues gathering momentum.

US stocks are extending gains towards fresh all-time highs, while Asian, British and European stocks continue firming, regardless of soft macro data and slippery political ground. Even Italy’s FTSE MIB has stepped into the bull market.

Although we envisage the exhaustion of the actual rally sooner rather than later, the upside potential in the stock markets in such a challenging macro-political environment remains intriguing. Therefore, we remain alert for a potential squeeze in the global equity complex.