A major obstacle to quantitative easing (QE) in the Eurozone was today overcome, with the European Court of Justice (ECJ) deeming a precursor to the programme permissible under EU law. This makes the announcement of a QE programme by the European Central Bank (ECB) far more likely and seems to give a clear path for Mario Draghi and his team to ‘open the taps’ on an even looser monetary policy across Europe.
Of course, the ECJ stated that the Outright Monetary Transactions (OMT) programme was deemed to be an ‘unconventional monetary policy measure’, but one that was also ‘necessary’ and ‘legitimate’. For many investors, this is a rather obvious description of the current situation in the EU, with deflation of 0.2% being recorded and the Eurozone being in the midst of a lost decade, where averting recession is seen as something of a success.
The Effect Of QE
While a QE programme comes with no guarantees, the effects of it on the UK and USA in particular have been significant. It’s no coincidence that both economies are now posting strong GDP growth numbers, with their banks being relatively well capitalised and confidence returning following a period of asset price growth. It is hoped, therefore, that QE can have a similar impact on the Eurozone and will prove to be the stimulant that shifts its economic outlook from negative to positive.
The Impact On The FTSE 100
In the short term, the likely impact on the fortunes of the Eurozone may not be significant, but its effect on investor sentiment could be major. While there will inevitably be a note of caution among investors, confidence is likely to increase as the possibility of a European recovery finally becomes more of a reality. As such, the value of the FTSE 100 is likely to be given a boost in the short term.
Looking further ahead, QE could make a big difference to the performance of a great number of UK listed blue-chips. That’s because the Eurozone still represents a sizeable chunk of revenue for a relatively large number of FTSE 100 stocks and, if QE does have a positive impact, it could cause upgrades to earnings forecasts and deliver higher growth over the medium to long term. Clearly, calling it a bull market is far too premature, but something akin could take place if QE is launched and if it has a similar impact on Europe as it has done on the UK and USA.
A Note Of Caution
Clearly, the above discussion makes a number of assumptions and, as things stand, a QE programme has not even been launched in the Eurozone. However, today’s decision by the ECJ makes a QE programme much more likely and, if it is launched, then there is a good chance that its overall effect on the FTSE 100 will be positive, rather than negative, thereby affording the UK’s leading index a brighter future.