JPMorgan: "The ECB Could Purchase Equities Next"
By Tyler Durden
On Thursday, after the ECB’s stunning announcement that it would for the first time start monetizing corporate debt, we joked – or so we thought – that “within 6-9 months we expect to add a chart showing Europe’s junk bond market which will be next on the monetization menu, followed shortly after by equities and kitchen sinks.“
As it turns out, this wasn’t a joke, and overnight JPM’s Nikolaos Panigirtzoglou explained what to “expect” next from the ECB:
To the extent this week’s ECB decision marks a shift towards private sector asset purchases, the ammunition the ECB has expands hugely.
Assuming the ECB will be willing to navigate eventually into other private sector asset classes, the asset universe for QE purchases could expand to include uncovered bank bonds, bank loans and equities.
Will the ECB buy equities outright? Of course: after all the reason for all the “helicopter money” and cash ban talk is because central banks are now utterly desperate and have their backs against the wall. They will try anything, including what until just years ago was considered absolutely insanity: buying stocks outright.
Incidentally, at just the same time as the above “joke”, we said something else which we thought was sarcasm: that corporations would take advantage of the ECB-guaranteed IG bid to issue debt and, having nothing else to do with the proceeds, use the funds to buyback their own stock, a rerun of what has been happening in the US for the past 4 years.
What happened:
– ECB buys corporate bonds
– Corporations use proceeds to buy back stock
– Market rises— zerohedge (@zerohedge) March 10, 2016
This too was not a “joke”, and here is JPM again explaining that we were spot on:
The ECB’s corporate bond program will result to lower financing costs and more limited financial distress over time. This coupled with elevated Equity Risk Premia will increase the incentive for European companies to buy back their own shares. We thus see a higher chance that share buyback activity will improve in Europe from its current dormant phase.
Finally, we predicted that the most acute impact of the ECB’s corporate QE action would be to impair an already painfully illiquid corporate bond market: “ECB purchases of company securities could serve to limit liquidity in a market where investors say it’s become harder to trade after banks cut their bond holdings to preserve capital in response to tougher rules.“
And, lo and behold, JPM just confirmed this as well, estimating that the ECB can purchase at most €3.5 -€6 BN in bonds per month before it damages the market, and that in general “ECB corporate bond purchase program will be more difficult and more fragmented from an implementation perspective, than either the government bond or the covered bond purchase program“:
Another implication …read more
Source: JPMorgan: "The ECB Could Purchase Equities Next"
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