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Global markets in speculation frenzy ahead of ECB meet
January 22, 2015, 6:01 am

The world's attention will be focused on Mario Draghi on January 22 when he announces the ECB Monetary Policy decision on quantitative easing  [Xinhua]

The world’s attention will be focused on Mario Draghi on January 22 when he announces the ECB Monetary Policy decision on quantitative easing [Xinhua]

Markets around the world have gone into fierce speculation mode awaiting the outcome of the European Central Bank’s (ECB) Monetary Policy meeting today.

From New York to London to Malaysia and Australia, stocks rose in anticipation of the ECB’s awaited announcement that it would intervene to halt the Eurozone’s slide into recession by launching a bond-buying program known as quantitative easing (QE).

Essentially, the ECB will buy back government bonds that were purchased by the banks. This in turn creates more money in circulation in the Eurozone economies. It is tantamount to printing more money.

The bond-buying – or QE – mechanism therefore provides banks with more funds to use for loans to finance projects and fuel investment.

The question that global markets are now waiting to have answered is how much bonds the ECB will buy and for how long.

Some media outlets reported that the ECB’s Executive Board, which met on Tuesday, had suggested QE of $58 billion beginning in March or April. But will this last for a year or till the end of 2016?

Markets reacted quickly – the Dow Jones Industrial Average nudged up nearly a quarter of a per cent while the S&P energy shares rose shy of 2 per cent.

In Asia, Hong Kong’s Hang Seng Index was up 0.43 per cent; China’s Shanghai Composite Index and Japan’s Nikkei shifted between gains and losses when markets opened on Thursday.

Australian and South Korean markets also opened higher.

The euro, which last week went into a tailspin after the Swiss Central Bank (SCB) ended its peg to the Eurozone currency, held mostly level on Wednesday, a day ahead of the ECB meet.

But … how much?

Markets will particularly be paying attention to the QE’s duration. When the US launched its own $85-billion bond-buying regimen in 2009 it is unlikely anyone could have predicted it would last until mid-2014.

Some analysts are theorizing that the ECB QE would involve a total of 500 billion euros lasting till the beginning of 2016, but others point to the SCB’s sudden move last week as an indication that the bond-buying program could reach 1 trillion euros.

The more, the better could be what European markets are calling for. Germany is the Eurozone’s powerhouse so when its DAX index closes up 0.41 per cent reaching an all-time high, the pressure is on ECB head Mario Draghi to pull the QE rabbit out of the hat. And this is from a Germany that has long opposed QE.

Although not a Eurozone member, London’s FTSE 100 rose 1.6 per cent to sit at a six-week high on expectations that the ECB will bow to market pressures and announce the beginning of QE in two months.

On January 2, Draghi told German daily Handelsblatt the ECB is preparing to “alter the size, pace and composition of our measures in early 2015” – so much so that the balance sheet will jump from two to three trillion euros.

That one trillion extra is what has some predicting that the size of the QE will be in roughly the same amount.

Draghi’s earlier comments that he will push whatever it takes to lift the Eurozone out of spiraling deflation could mean that the QE could go as high as 1.5 trillion euros.

When Draghi makes his announcement at 8:30am EST (2:30pm Frankfurt time) it will be just before markets open in North America, just before they close in Europe and after they’ve closed in Asia.

With the Greek national elections looming and its membership in the Eurozone likely at stake, European markets are in for a rollercoaster ride this quarter.

The BRICS Post with inputs from Agencies

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