Unigestión | Whether it is called QE or not, buying bills (swapping reserves for short-term bonds), injecting liquidity into the market place and growing the balance sheet affects risky assets. Market conditioning (the Pavlovian effect) since the GFC is that stock markets cannot go down when the Fed is growing the balance sheet. Additionally, the Fed’s extremely aggressive response to the repo blowout in September is another signal to markets that it has a very low tolerance for market fluctuations.
Expectations for Draghi’s second QE programme were running so high that, in the end, he disappointed the markets. Investors had bet on more aggressive stimuli, so the European stock exchanges tumbled over 3% at the close (having been in positive territory mid-morning). The euro jumped to over 1,09 dollars (its biggest rise since March) and European debt registered its largest increase so far this year.
MADRID | The Corner | “Further evidence has emerged that the euro area recovery is at risk. We acknowledge that German data were distorted by technical factors… but we still think underlying momentum is fading in Germany,” Barclays’ François Cabau commented. And that means, for an increasingly number of experts, that the prospect of QE II is becoming more entrenched. Some believe it could happen before New Year.