Amundi - Cross asset strategy: Special Focus

Abstract:

The ECB is expected to announce a large QE on January 22, following its monetary policy committee meeting. 

The CREDIBILITY of the programme will determine the impact on financial markets. The ability of the ECB to announce a large QE and to execute it successfully is crucial.

A large QE would favour risky assets… if it is substantial, well perceived, and if the ECB demonstrates the capacity to execute it successfully.

Bond yields would decline further, while sovereign spreads would narrow. Pay attention to the terms of the QE, particularly if it excludes some sovereign debts (rating threshold, public finances threshold…)

Without credibility, the impact of QE may be disastrous, on economic sentiment on one hand (GDP growth expectations, investment, consumption, fiscal balances, debt sustainability), and on financial markets on the other hand (sovereign spreads, equities, corporate bonds particularly).

The EFFICIENCY of the programme will determine the impact of the real economy. Some transmission channels will be at work: FX channel, Interest rate channel, liquidity and wealth effect channel and inflation expectations channel.

Credibility is the first round effect of the announcement, while efficiency will be the second-round, to be manifest in a few months.