Quantitative Easing in the Eurozone: What’s Next?
In this week’s edition of Market Week in Review, Consulting Director Sophie Antal Gilbert discussed with Kara Ng, senior quantitative investment strategy analyst, the key takeaways from European Central Bank (ECB) President Mario Draghi’s July 20 press conference on the bank’s quantitative easing (QE) program.
In Ng’s view, the main message is that while the European economy has vastly improved, the ECB is not ready to end QE just yet. She noted how Draghi’s comments last month unnerved markets and caused a “mini taper tantrum,” when he seemed to suggest that an extreme monetary stimulus may no longer be necessary. This time around, Ng believes Draghi’s goal was to do the reverse: not spook the markets, and provide more detail than he had offered in his June statements.
Draghi’s comments this week illustrate that he’s proud of the economic recovery in Europe—but is aware that it’s still dependent on the bank’s current QE policy, Ng said. She noted that Draghi also mentioned that the robust economic growth in the Eurozone hasn’t translated into inflationary pressure yet. Because of this, she believes the ECB will keep its monetary policy loose—for a while. Ng and other Russell Investments strategists expect that the bank will gradually taper the monetary stimulus program next year.
Steady growth in China—what does this mean for emerging markets?
Switching to Asia, Ng noted that China’s real gross domestic product (GDP) growth number was 6.9% for the second quarter of 2017, year-on-year—which in her mind is “good, steady and above industry consensus expectations.” Other China macroeconomic data, Ng said, such as retail sales and industrial production, also came in good and above expectations for the second quarter. “China has shown some resilience lately,” Ng remarked. This is important to her and other Russell Investments strategists because they see China as a key driver in the growth of emerging markets. In a nutshell, “emerging market equities are cheap, and the business cycle is vastly improving,” she concluded.
Early estimates from second quarter earnings season
Sticking with the second quarter theme, Ng discussed preliminary observations from the second quarter U.S. earnings season, which is now underway. Ng noted that it’s still early in the season, with far more companies expected to report next week. However, so far, second quarter earnings have ranged from mixed to positive, she said.
According to Ng, of the roughly 20 percent of U.S. firms that have reported, about 80 percent have beat earnings expectations. She noted that bottom-up projected earnings are in the high single digits—but that some of this strength is still from leftover effects from the energy sector, which is recovering from a year ago. If the energy industry is removed from second quarter estimates, Ng said, then U.S. earnings will likely be closer to the mid-single digits, which is more modest. As for Europe? So far, the estimated earnings there appear fairly similar, Ng said—although like their U.S. counterparts, most European firms haven’t reported yet.
Watch the video.