|Mike Lenhoff, Chief Strategist|
Looking back on the past few weeks, the ECB has introduced its Outright Monetary Transactions (OMTs) and the European Stability Mechanism (ESM) has the all-clear to pursue its mandate ‘to safeguard the financial stability of the euro area as a whole and of its Member States.’ Until last week, that might have sounded a little vacuous but the ESM is expected to start life next month and be fully able to offer support for the eurozone banks and for sovereign states by early next year. In Spain’s case, support for the banks has already begun (with the European Financial Stability Facility).
Overcoming a hurdle that helps stabilise and improve the financial position of the banks must help to reduce the prevailing uncertainties reflected over the past few years in the volatility of equity markets, the flight to safety in quality government bond markets and this year’s loss of momentum underlying the recovery in the global economy. It remains to be seen how operationally effective the programme of ‘request, conditionality and assistance’ will be. However, a big step forward has been taken and this should improve the tone for equity markets.
It should also lessen the need for the flight to safety in quality bond markets, especially if you think QE3 is inflationary. But with unemployment being what it is and the risks already on the downside for the economy, any inflation coming through via commodity markets, will merely squeeze real incomes and spending and depress output and employment. More >