So how are markets likely to respond if we’re correct? Stepping down from a monthly purchase pace of €60bn to €20bn will be a bitter pill for markets to swallow.
And, as ECB tapering will coincide with the Fed’s wind-down of its own balance sheet, it’s likely to put upward pressure on bond yields.
But we’d expect this pressure to be contained. So far, the ECB has done a very good job of managing the market’s tapering expectations, and we expect it to continue to do so.
The one exception has, perhaps, been the strength of the euro. But with more Fed rate hikes on the horizon and the ECB working hard to push back on the timing of its first rate hike, we think further euro upside is limited.
For European risk assets more generally, two key points stand out:
First, the ECB is tapering its bond purchases because the economy is strong and no longer needs them.
Second, low inflation means the ECB will withdraw monetary accommodation very gradually. So as long as the Governing Council gets its communication strategy right—and recent omens have been good—we think there’s little to fear.
The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
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