Global Daily – Will the ECB buy equities?

by: Nick Kounis , Bill Diviney

ECB View: Equity purchases unlikely at this stage – Given the likelihood that the ECB will restart net asset purchases, one of the questions we receive from clients is whether the central bank will include new asset classes in its purchase programme. Equities is the most commonly mentioned. Given this, we thought it would be a good opportunity to highlight some of the main conclusions from a note we wrote on this subject some time ago (see here). Overall, we do not expect the ECB to buy equities at this stage. Perhaps the most simple reason is that the Eurosystem should be able to execute a sizeable new programme by focusing on the existing asset classes and making some tweaks, such as increasing the share of corporate bonds and raising the issue(r) limit for regional and agency bonds. However, there are also issues with equities in particular. The ECB could legally buy equities – and like the BoJ – it would likely do this via ETF purchases. However, there are question marks about how effective such a programme would be. Eurozone households tend to hold a relatively small share of their wealth in equities, therefore the wealth effect on consumer spending is relatively modest. The extra headroom an ETF programme would provide would also likely not be very large. Furthermore, the potential risk of losses is significant and the Eurosystem’s accounting framework suggests that ETF holdings will need to be measured at end-of-period market value. That could mean that any price fall would show up relatively quickly. Given these considerations, we think the ECB would only consider equity purchases if the outlook for the economy was to take a much sharper turn for the worse, and/or if there were serious tensions in financial markets associated with unusually high risk premia. (Nick Kounis)

UK Politics: Possible Conservative defections raise election risks –
News broke over the weekend that two Conservative Party MPs, Philip Lee and Guto Bebb, are planning to defect to the Liberal Democrats on 24 July – the very same day that the new Conservative leader (likely Boris Johnson) is set to become Prime Minister. This would be enough for the Conservatives to lose their majority at a stroke, leading to a potentially imminent general election. We had flagged the prospect of an early snap election in the UK last week, and while unconfirmed, this latest development would raise that risk considerably. We judge that even in the absence of defections, Mr Johnson will struggle to govern with such a wafer-thin majority, and that he might well choose himself to call an election, even if he is not forced to do so. While an election could ultimately lead to a more benign Brexit scenario if it leads to a Labour government or a ‘Remain’ coalition with the Liberal Democrats, the heightened uncertainty would likely weigh on markets and especially sterling in the near-term. (Bill Diviney)