ECB delivers another “whatever-it-takes” moment

Pandemic Emergency Purchase Program (PEPP) launched: Yesterday evening the ECB surprisingly launched its new QE program “to counter the serious risks to the monetary policy transmission mechanism and the outlook for the euro area posed by the outbreak and escalating diffusion of the coronavirus, COVID-19.”


  • Following the announcement of a bold policy package at the March 12 meeting the ECB intensified its attempts to fight the pandemic fallout and to restore confidence in EMU.
  • Yesterday evening it surprisingly launched the Pandemic Emergency Purchase Program (PEPP) with a volume of € 750 bn that can discretionarily be used to fight the coronavirus fallout.
  • Most important, it could be extended and some self-imposed restrictions like the issuer limit would likely be scrapped if needed.
  • This unprecedented monetary policy move jointly with the commitment of the Eurogroup to do “whatever it takes and more, to restore confidence and support a rapid recovery” goes in the right direction as it helps to stabilize markets and to improve the demand side of the economy.
  • Overall, markets reacted mixed but positively with euro area sovereign bond spreads narrowing. The 10-year BTP-Bund spread receded by about 50 bps to towards 200 bps whereas the iTraxx crossover has merely narrowed from 707 bps to 670 bps, only a small move towards the 300bps seen a month ago.

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US President-elect Joe Biden has unveiled a $1.9 trillion stimulus package proposal. Following the recent increase in cases, China has imposed new restrictions and lockdowns in the Hebei province. Canada has implemented new restrictions and a provincewide curfew in Quebec that will last until February 8. German Chancellor Angela Merkel warned that the recent rise in Covid-19 cases could force the country to prolong the nationwide lockdown until April.
Following a monster rally in stocks last autumn, multiples are well above historical averages, but equity investors can count on lingering low yields, tighter credit spreads and increasing central banks’ balance sheets which in turn maintain low the cost of equity and the discount rate of future cash flows.
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