Speculation is rife that the ECB will start buying government bonds as part of the QE programme sooner rather than later.
This is driven by the muted take-up of the ECB’s cheap loans programme (a.k.a. TLTRO, Targeted Longer Term Refinancing Operations) by Eurozone banks, announced yesterday…
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Viktor Nossek, WisdomTree Europe
However, large scale government bond purchases by the ECB may benefit Eurozone banks the most, not least because Eurozone banks have
piled on to government debt ever since the ECB’s launched its term loan programme in 2011 and 2012 (a.k.a. LTRO I and II) which, together with its implicit guarantee to buy government bonds through its OMT program in 2012 and the BASEL III regulation requiring no capital cushion against Eurozone government debt, induced them to do so on a large scale.
Were the ECB to become an active buyer on the secondary markets, it would not only help suppress Eurozone bond yields further, it would also help bolster Bank’s trading book in government bonds and provide liquidity to those banks wanting to sell them, realistically seen as an effort to add more capacity for loan book growth.
Eurozone bank STOXX play at the heart of Eurozone’s recovery or failure
Underpinned by monetary stimulus, falling bond yields, stress tests and deflation, sentiment in Eurozone equities is either very bullish or bearish. Driving it are the banks which, through large-scale government bond purchases since 2012 have become inextricably linked to the creditworthiness of governments. With Spanish and Italian banks holding EUR 750 billion of government debt combined alone, the sentiment in bond markets is a key gauge for Eurozone banks’ stock performance. Eurozone bank stocks’ sensitivity to government bond yield is unmistakable. When Italian BTPs (government bonds) succumbed to volatility in May and August 2014 on the back of contracting Italian GDP data, is was because of the threat of deflation and its destabilising effect on public finances of Italy that has stirred up doubts about Italy’s lenders. Italian bank stocks as a group fell nearly 6%* on the announcement on 14 May 2014 and fell 3%* on 5 November 2014.
Political risks drive volatility in Eurozone
The ECB’s recent announcement to potentially include government debt purchases as part of its QE program that currently encompasses covered bonds and ABS, is a direct response to fight the deflation threat and to supplement any disappointing take-up in cheap loans, such as happened today. But the risks are becoming increasingly political, as pressure for more austerity coming from Germany and Brussels raises the stakes for Italy that is triple dipping into recession and is failing to revive the labour market. An eventual exit from the EMU and a return to a devalued lira may be the only politically acceptable solution. Adding to the political risks are Germany’s resistance to government bond purchases, even as Italy and France team up to pressure the EC to take a more ‘flexible’ stance on deficit spending. In the middle stand the banks which remain hesitant to transform ECB’s monetary stimulus into credit extension.
Against these risks, the banks stand to potentially reap the highest rewards from the ECB’s policy actions.
Eurozone banks – a beta play on Eurozone equities
Eurozone banks have a beta of 1.4 to the broader Eurozone equity market, implying that bank stocks react overly sensitive to sentiment on Eurozone equities. Given that the two benchmarks are highly correlated, investors with a strong bullish or bearish conviction can position around the heart of Eurozone’s economy efficiently through gaining exposure to the Eurozone bank equities. In fact, a 3x geared ETPs tracking Eurozone banks could help investors attain the exposure through less capital deployment or amplify their exposure with the same capital. Boost EURO STOXX Banks 3x Leverage Daily ETP (3BAL) and Boost EURO STOXX Banks 3x Short Daily ETP (3BAS), offer investors such a leveraged exposure.
*Based on FTSE Italy Banks index
Fonte: ETFWorld.it
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