The past week has ended on the good results achieved by European stock exchanges that have earned from the profits of the major national titles. This rosy scenario has been created thanks to the ECB that lowered all three main rates.
The N. 1 of the European bankers, Mario Draghi, has managed to surprise the markets by cutting the interest rate to 0.00% from the previous 0.05%, bringing it to new record lows. The same fate befell the Deposit Facility Rate that was set at -0.40% from -0,30%.
The markets/analysts were expecting a maintenance of both rate but everything changed.
The Marginal Lending Rate was lowered to 0.25%. Draghi launched also a new TLTRO operation: it will last 4 years and it will start in June 2016 with the possibility of a rate that can go up to the new deposit rate (-0.40%). The TLTRO contemplates targeted credit operations for commercial banks which grant loans to the economy.
The measure most surprising, however, concerned the extraordinary plan of monetary expansion: to the government bonds will be added also the corporate bonds allowed by non-financial companies. Not even the Federal Reserve had dared so much at the outbreak of the 2008 financial crisis.
Before the announcement, the euro yielded 0.74% against the dollar to $ 1.0918. After the extraordinary measures announced by the ECB, the EUR/USD exchange rate has definitely veered downward by fiddling the minimum day rate at $ 1.0822.
During the press conference of the ECB President, Mario Draghi, the exchange rate has changed direction sharply pushing up and it settled in positive territory over 1.1 $.
It is the case to say that the ECB has declared war to deflation and interest rates making use of heavy artillery.
At this point the European assets (both equities and bonds) should benefit more than the counterparties. But who are the real beneficiaries of the new measures taken by the ECB?
Among these we may include corporate bonds, convertible and those hybrids between stocks and bonds.
Bank stocks will be among the biggest beneficiaries, those who clearly should show the best performance in the medium term. Banks will count on the Quantitative Easing which will extend up to March 2017 and it will have a capacity of 80 billion Euros per month. This scenario of easy credit will help the Italian banks, but also less solid German institutes.
Among disadvantaged there are the Reverse Yankees (i.e. groups that in the US issue securities in euro) and the debt issued by countries that are outside the Eurozone.
But be careful on the new TLTRO operation. This could backfire because the banks are paid to make credit, but if companies do not ask enough loans there is a danger that they will be also granted to borrowers at risk of default.
The next move on interest rates is up to the Federal Reserve. What will the United States’ Central Bank decide on March 16? What will happen to the EUR/USD exchange rate that has touched the maximum levels of nearly a month?