Europe and China ready to jump-start their economies

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Dec. 4 2020, Updated 10:52 a.m. ET

Central banks tackle growth malaise

Key policy meetings held last week at the European Central Bank (or ECB) and the People’s Bank of China (or PBoC) indicate that policymakers are ready for additional stimulus measures to jump-start their respective economies.

However, ECB president Mario Draghi stopped short of announcing sovereign bond purchases, which are akin to the Fed’s monthly bond buying program. The ECB is planning to expand its balance sheet over the next two years by almost a trillion Euros. This would return the bank’s monetary base to March 2012 levels. The decision is attributed to fears of a triple-dip depression and deflation in the Eurozone.

PBoC admits to stimulus steps

The PBoC, on the other hand, announced it would use “flexible tools” to maintain liquidity and credit growth. It also confirmed that over the past two months, it has purchased 3-month loans worth ~$126 billion as a means to inject liquidity into the Chinese financial system (FXI).

The Bank of Japan already announced on October 31 an expansion to its monetary easing program.

International Banking Symposium by the Banque de France

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The week was capped by Friday’s International Banking Symposium organized by the Banque de France. The event brought together the governors of major central banks as well as prominent academics and economists from around the world. The symposium focused on addressing global imbalances. We’ll be covering the symposium in a separate series, so please visit our Fixed Income page to stay updated on this event.

Financial markets impact

Unconventional stimulus measures from central banks usually end up injecting liquidity in global financial markets. They’re especially relevant to emerging market economies (or EMEs), such as the Vanguard FTSE exchange-traded fund (or ETF) (VWO). They have seen massive inflows from institutional investors due to the Fed’s Quantitative Easing (or QE) programs. The Fed exited its monthly bond buying program (or QE3) on October 29. QE3 resulted in the Fed purchasing $1.7 trillion in longer-term Treasuries and mortgage-backed securities since October 2012.

In this series

Despite the Fed’s exit from QE3 and its implications for rate tightening, there were bright spots for U.S. stock, Standard and Poors depositary receipt (or SPDR) S&P 500 ETF (SPY), the SPDR Dow Jones Industrial Average ETF (DIA), Vanguard Total Bond Market ETF (BND), and iSh 20+Y Trs Bd (TLT) markets. In this series, you’ll read why stocks touched record-upon-record highs in the week ending November 7. You’ll also read about releases that pushed investment-grade bond markets higher in the week.

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