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How big is Draghi’s Bazooka?

The European Central Bank (ECB) is expected to announce quantitative easing (QE) at their policy meeting in Frankfurt. The market expectation is for an injection into the economy of €1 trillion into the Eurozone, therefore this belief is priced into the current market prices. The Euro has weakened, and Gold has been bid in recent days, however yesterday on the source (WSJ )that the ECB would buy roughly €50 billion of bonds per month, the Euro rallied and Gold softened. Traders attempted to quantify if €50 billion was a disappointment to the current amount of bond buying priced in.

What time?

At 12:45pm (London) there will be the interest rate announcement followed by the press conference with ECB President Mario Draghi at 13:30pm. The amount of bond buying is likely to be announced at the press conference, to disappoint the financial markets could be disastrous. The size and duration of QE will be the focus of traders today.

Money flows

The QE is seen as a positive for economies outside of the single currency, as there isn’t restrictions on where the cash will flow.  The likely benefits are western equities, and immediately for the UK, will be London property. In previous rounds of QE (US, UK, ECB and BoJ) there has been a strong correlation between the printing of money by the central bank and rally’s in the equity market.

How does quantitative easing work?

Quantitative easing (QE) is unconventional monetary policy; the central bank (in this case the ECB) creates new money electronically to buy financial assets such as government bonds. The theory is that the injection of funds into the economy benefits the economy by reducing interest rates and helps people and businesses spend and invest.  QE is also known as “printing money” and is a controversial policy with the full effects not yet known. 

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