What We Think Could Drive European Markets in the Coming Months

As European investors and market practitioners return from their summer vacations and prepare for the final third of 2019, our Head of European Fixed Income David Zahn highlights the issues he thinks will drive markets in the coming months. Here’s what he views as the most important issues for global investors following developments in Europe.

Eurozone Monetary and Fiscal Policy

In our view, the main focus right now for European investors returning from their summer holidays will be the European Central Bank’s (ECB) meeting on September 12.

The question is whether the ECB can deliver on market expectations, given how much European bonds have moved in the last three months.

In the past, the ECB has had a reputation for over-delivering. However, our concern now is whether its communication will be enough to support the market.

We expect a number of announcements:

  • An interest-rate cut

We don’t think it really matters the extent of that cut—it might be 10, 15 or even 20 basis points—as long as it’s meaningful.1

  • Tiering

We expect the ECB also to introduce tiering—effectively lowering the charges that banks pay on some of their excess cash—to help the banking system. The introduction of tiering would signal to the market that rates will likely remain low for an extended period. If it were going to cut rates for the short term (with the expectation of hiking them again in six months or a year) it likely wouldn’t go to the bother of introducing tiering.

  • A restart of quantitative easing (QE)

We expect a restarted asset purchase program predominantly centered on government bonds, but probably with more focus on corporate bonds than previously.

  • Raising or removing the asset purchase cap

We think the ECB will probably announce an intention to reconsider/adjust the percentage of each issuance it can buy. Currently, the ECB is limited to purchasing no more than 33% of any issuance. We’d expect that policy to be revised. Under its asset purchase program, the bank can purchase €30 billion a month but with a 33% cap it will very quickly exhaust the asset pool.