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3 Things To Know About QE in Europe

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By Sheyna Steiner for Bankrate.com

The European Central Bank announced a new effort to stimulate inflation in the Eurozone and further weaken the currency: quantitative easing, or QE.

Per the press release from the European Central Bank, or ECB: The central bank will purchase sovereign bonds "in order to address the risks of a too prolonged period of low inflation."

Combined with asset purchases begun last year, the ECB will be buying 60 billion euros worth of securities each month until at least September 2016.

What do investors need to know?

Time to plan that trip to Paris. Even if international travel isn't in the cards, investors could benefit in the long run from the European QE, at least if the results of the program model those of the American easing program.

The American central bank went through three versions of the program, beginning in the depths of a horrific stock market downturn in November 2008 when the Standard and Poor's 500 index was below 1000, and ultimately ended in October 2014 with the index buoyed above 2000.

It's not a slam dunk, though.

The impact of the asset purchase program across the pond is not likely to happen overnight. Things are not great in the Eurozone.

"The main aim of the program is to reverse the downward trend in inflation expectations. It's an open question as to how much of a steepening of the yield curve we'll see. I'm not sure that there will be that much of a bounce so soon in Europe," says Paul Christopher, head of international strategy at Wells Fargo Investment Institute.

"The challenge is that the ECB needs to raise inflation expectations, but in the banking system, the monetary transmission mechanism is not working. It's hard for the central bank to do anything that will affect the real economy," he says.

With scarce demands for loans and reluctance on the part of banks to lend money, traditional levers of monetary policy, namely interest rates, have little impact. The asset purchase program should inject more money into the banking system, making everything a little bit looser.

It won't be the same as the quantitative easing program in the U.S., though. The central banking system is more fragmented in Europe, so it may take longer for the program to work.

"It will take some time. There won't be an immediate impact on confidence in Europe," Christopher says.

Christopher predicts that prices of European equity assets will rise somewhat and "you'll also see the euro fall a bit further," he says.

Export companies and businesses that sell products in the U.S. will likely see an increase in earnings, according to Christopher. If you have a diversified global portfolio, you can pat yourself on the back for being, potentially, well positioned with exposure to European stocks.

Plus this week's move by the ECB makes it more likely that the Federal Reserve will feel confident about an interest rate hike in the U.S.

"If the ECB action today helps create more confidence, it eliminates a potential reason for the Fed to delay raising rates," Christopher says.

This article was originally published on Bankrate.com.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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