While there was plenty of debate about the size of the programme and how it was be administered, there was little doubt that the ECB would announce some form of bond buying programme at its meeting on Thursday evening, Hong Kong time, in an effort to inject some much needed stimulus into the eurozone economy.
US quantitative easing had a massive impact on Asia, with a big chunk of that money flowing into the region as investors sought the higher returns available. But there is less optimism that Europe’s programme will create the same feelgood factor. In part this is because there is plenty of scepticism that the ECB will go far enough to provide the reassurance that markets are looking for.
“If the ECB disappoints in scope and size, I think we’ll definitely see some cutting back of risk from investors,” said a head of ECM syndicate. “This will be more so by hedge funds, which will make it harder for us to do deals.”
Even if the market gets what it wants, there has been so much information in the public domain already that bankers reckon markets have largely taken it into account. The most recent leak on Wednesday night revealed that the ECB was debating buying around €50bn ($58m) of bonds per month.
“I don’t think there will be any direct impact on the Asian bond market apart from a pick-up in investor sentiment, which I think has already been priced in because of the leakage last night,” said a Hong Kong-based bond syndicate banker on Thursday. “[€50bn] is more or less within market expectations, which is good news for everyone.”
This subdued reaction was reflected in equity markets during the day. Asia’s major indices opened lower on Thursday morning, although most ended the day in positive territory. The Hang Seng closed 0.7% higher, at 24,522, while the Nikkei 225 added 0.3% to 17,329.
Risk-off
In a note published ahead of the ECB meeting, analysts at Bank of America Merrill Lynch outlined three potential scenarios in Asia that could follow the decision. One was that the central bank would over-deliver, a situation the analysts reckoned was what markets were hoping for. Risky assets, particularly equities, would benefit, but Asian fixed income would still suffer because rising US rates would be the more important factor.
In the event that the ECB completely disappointed, the result would be "a complete risk-off scenario for the market", said the analysts. The third scenario was for the ECB to behave in line with BAML's expectations of a €500bn-€700bn programme over 18 months, which the analysts thought would be "marginally positive" for Asian assets.
Part of the reason for continued scepticism among Asian bankers, meanwhile, is the fact that while QE could be a positive, there are plenty of other issues causing uncertainty in markets, making investors likely to remain in risk-off mode. These include Greece’s possible exit from the eurozone, continuing strife in Ukraine and concerns about China’s growth. Add to that the surprise decision by the Swiss National Bank to remove the franc’s peg to the euro, and investors are more than a little wary.
“Even if the money flows into the Asian bonds market, it will focus on high grade well known names, not high yield, high risk and debut issuers,” said a bond syndicate banker.
But among the doubts, some bankers still reckoned that Asia could see upside from the ECB action.
“The impact of the ECB’s QE will be more than just domestic and could flow on to Asia, in the same way that the Federal Reserve’s QE did and Japan’s did,” said an ECM banker. “Now that the Fed has cut its QE and is planning to raise rates, the ECB could step in and fill that void. If it’s large enough, the party can keep going.”