Buoyed by European news, markets wait on QE3 question

Global stocks rose, while gold prices jumped and high-yield currencies rallied. Key to the positive response was the delivery of the Outright Monetary Transaction (OMT), a large-scale government-bond purchasing programme, announced by ECB president Mario Draghi. 

The ECB will buy sovereign bonds at the shorter end of the curve with one to three-year maturities in the secondary market. No ex-ante quantitative limits will apply to the size of the transactions and there will be no bond-yield targets. One important issue will be the strict conditions attached to the EFSF-ESM programme in terms of the International Monetary Fund’s (IMF) involvement. Regarding seniority, the IMF accepts the same treatment as any private or other creditor for bonds issued by euro-zone countries. Furthermore, liquidity created by the OMT will be fully “sterilised”. As far as the legal status is concerned, the purchase cannot be immediately activated.

Excitement has continued this week, with markets focusing on Germany’s Federal Constitutional Court decision today on whether Germany can participate in the European Stability Mechanism (ESM), the region’s ?500-billion bail-out programme, as it is one of the euro zone’s most important instruments in its response to the debt crisis.  

Moreover, tomorrow, the Federal Open Market Committee will conclude a two-day policy meeting which will consider whether more easing is needed to stimulate the US economy. A third round of quantitative easing (QE3) is the central bank’s main option, as Friday’s US non-farm payroll data showed 96,000 jobs being added last month, far less than the expected 125,000. 

A meeting of European Union Finance ministers will be held on Friday and Saturday, the last big event of the week. 

We will all be watching the outcome of these events closely, and will hope for a positive impact on the markets.

 

Duangkamon Phunkaew is a senior dealer in the Treasury Division of Bangkok Bank.