ECB buying corporate debt

China came through if only in a modest way, reporting 7.3% growth year on year, slightly above expectations but below the government's target of 7.5%. This is a growth rate that the developed economies can currently only dream of. There has been some recent speculation that the Bank of China will introduce further measures to stimulate their economy, today's news will probably neither encourage nor dispel that speculation. 

We mentioned in Tuesday's blog the differing fortunes of two tech heavy weights reporting on Monday, IBM and Apple, overall the results season appears so far to be in line with expectations.

The eye grabbing news on Tuesday was a report on Reuters that the ECB are thinking about buying corporate bonds, starting in December. We have reported in the past how central banks from time to time in history bought directly into the equity market, Hong Kong being the last example during the 1997 Asian crisis.

Were it to be true that the ECB are contemplating such a move it would be akin to the move the Hong Kong made in 1997. Put simply if a company knows its debt is almost underwritten by the ECB it adds great value to the equity. The ECB later in the day denied that this proposal is on the agenda; one would suggest the denial means one of two things in our mind.

Like the support for a football manager just before he gets handed his P45, the ECB are denying the move to prevent the markets moving ahead in anticipation. On the other hand, by leaking the idea they hope the speculation will do the job for them. What is clear is that ECB are limited in their ability to buy government debt for the reasons we have highlighted before, but are committed to expanding the balance sheet by 1 trillion euros. So far the assets they have suggested they will buy, for example asset backed securities, the volume of issuance is not large enough for them to achieve this and its clear they will have to broaden their scope. 

Equity markets had a good day on Tuesday following on from a decent close in New York. We pointed out a few weeks ago that investor sentiment was falling as highlighted by the ZEW survey and historically from such low levels equities had rallied in the past. Should speculation increase that the ECB were widening their scope to include assets such as corporate bonds sentiment could improve markedly and stock prices with it.

Posted on October 22, 2014 .