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Viktor Nossek, Head of Research at Boost ETP, a Wisdom Tree Company, commented on the implications:
- New LTRO (3) likely: The ECB will likely be looking to complement the negative deposit rate and policy rate cut with a term loan facility that would replace LTRO 2 : allowing banks to borrow at low interest rates form the ECB and loaning it out to SME at around 5% or higher.
- Bullish for banks: For banks this may be very bullish, as it will provide a new potentially profitable carry trade opportunity (borrowing cheap, lending expensively) in the loans market, that banks previously exploited in the bond markets with LTRO2: (borrowing at 1% and earning 5,6 or 7% on Spanish/Italian government bond in 2011 and 2012)
- Bullish for Eurozone bonds and equities: Bullish for Eurozone bonds The monetary stimulus will remove deflation fears and the destabilising effect this would have on macro stability in Eurozone’s southern periphery. While inflationary expectations in Eurozone will remain muted, the real inflation risks are outside the Eurozone, most notably in US and more recently emerging in Japan as well. Hence, ECB stimulus may compel bond investors to allocate into Eurozone.
- Bullish for Eurozone and equities: Banks receive an extra shot in the arm, with the ECB promoting the revival of banks’ loan books Banks stocks may set benefit the most, as would interest rate sensitive equity benchmarks such as the FTSE MIB and EURO STOXX 50, where banks are relatively overrepresented
