JPMorgan: "The ECB Could Purchase Equities Next"

Tyler Durden's picture

On Thursday, after the ECB's stunning announcement that it would for the first time start monetizing corporate debt, we joked - or so we thought - that "within 6-9 months we expect to add a chart showing Europe's junk bond market which will be next on the monetization menu, followed shortly after by equities and kitchen sinks."

As it turns out, this wasn't a joke, and overnight JPM's Nikolaos Panigirtzoglou explained what to "expect" next from the ECB:

To the extent this week’s ECB decision marks a shift towards private sector asset purchases, the ammunition the ECB has expands hugely.


Assuming the ECB will be willing to navigate eventually into other private sector asset classes, the asset universe for QE purchases could expand to include uncovered bank bonds, bank loans and equities.

Will the ECB buy equities outright? Of course: after all the reason for all the "helicopter money" and cash ban talk is because central banks are now utterly desperate and have their backs against the wall. They will try anything, including what until just years ago was considered absolutely insanity: buying stocks outright.

Incidentally, the ECB is already buying stocks, only indirectly for now.

At the same time as the above "joke", we said something else which we thought was sarcasm: that corporations would take advantage of the ECB-guaranteed IG bid to issue debt and, having nothing else to do with the proceeds, use the funds to buyback their own stock, a rerun of what has been happening in the US for the past 4 years.

This too was not a "joke", and here is JPM again explaining that we were spot on:

The ECB’s corporate bond program will result to lower financing costs and more limited financial distress over time. This coupled with elevated Equity Risk Premia will increase the incentive for European companies to buy back their own shares. We thus see a higher chance that share buyback activity will improve in Europe from its current dormant phase.

Finally, we predicted that the most acute impact of the ECB's corporate QE action would be to impair an already painfully illiquid corporate bond market: "ECB purchases of company securities could serve to limit liquidity in a market where investors say it’s become harder to trade after banks cut their bond holdings to preserve capital in response to tougher rules."

And, lo and behold, JPM just confirmed this as well, estimating that the ECB can purchase at most €3.5 -€6 BN in bonds per month before it damages the market, and that in general "ECB corporate bond purchase program will be more difficult and more fragmented from an implementation perspective, than either the government bond or the covered bond purchase program":

Another implication of the ECB corporate bond purchase program is related to the liquidity of the European corporate bond market. Under what conditions will prospective ECB purchases be damaging for the liquidity of the European corporate bond market? How does this liquidity compare to the liquidity of other segments of fixed income markets such as government bonds, covered bonds and asset backed securities where the ECB has been purchasing bonds for a year now?

* * *

The capacity of the ECB to purchase corporate bonds is also a function of the how the primary market responds to ECB buying. The primary market issuance is running at a rather slow pace of around €12bn a month currently. So again assuming ECB primary market purchases of 5%-10% of issuance, would add another €1bn per month of potential ECB buying. This capacity would naturally expand if the ECB program manages to bolster issuance going forward, e.g. if it manages to induce corporates to buy back their own equity.


Without an expansion of primary market capacity, the above analysis suggests that a feasible purchase pace by the ECB in order to avoid damaging the liquidity and the functioning of the European corporate bond market too much is between €3.5bn to €6bn per month.


Finally, another consideration for the ECB should be trade sizes and market depth. The Trax report provides data on average trade sizes across fixed income sectors, which can serve as proxy for market depth. The average trade size for IG Corporates has been €850k during 2015. This is a lot lower than that of Government bonds, at €7m, or covered bonds at €2m. This means that the ECB corporate bond purchase program will be more difficult and more fragmented from an implementation perspective, than either the government bond or the covered bond purchase program.

Said otherwise, in order not to break the already illiquid IG bond market, the ECB's intervention will hardly make a marginal price impact aside from the implicit backstop of these securities.

Finally, here is the final "joke" we made: "The only thing the ECB will never monetize, however, is gold - perhaps because it is the only asset class that does not need central bank support?"

In retrospect, this too is not a joke, and we find it very disturbing that we now live in a world in which the only asset class that has no explicit central bank support, is a "pet rock."

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Uncle Sugar's picture

Bankers will eventually own the whole planet

TeamDepends's picture

The lunatics have taken over the asylum.

-.-'s picture

Mr. Constancio, Draghi, Krugman, et allum,


I would personally like for you to buy the remainder of my VISA credit card.

That way, would you all not feel guaranteed in my ability to quickly consume once more?

Haus-Targaryen's picture

After equities comes helicopter money, which is where this will end in Europe if by some miracle the currency zone doesn't rip itself apart first.  

I think I'd be using my Helicopter money to purchase a nice little something like this:

max2205's picture

So if everything is so great why the crazy policies desperate to keep markets at highs from falling 

Panic time 

Cognitive Dissonance's picture

I think it's time to IPO Cognitive Dissonance. Say 10,000,000 shares at $50 per? Chump change in the billion dollar world of Wall Street. But maybe just enough to attract every central bank on the planet to stock up on Cognitive Dissonance.

Time to clean up my offering prospectus.

Manthong's picture

“There is no market… only interventions”

-Chris Powell, GATA

Excursionist's picture

At the risk of sounding like a naive hayseed fresh off the turnip truck, let me ask the following:  where is any discussion of whether the ECB's actions are legal?

It seems like not long ago that we were wringing our hands about whether the ECB will or won't purchase sovereign debt, since the bank's charter precludes it.

I recently lowered the dosage on my regimen of crazy pills, so I admit I may be missing something here.

markar's picture

Legal? they crossed that rubicon long ago. Besides, laws are only for the little people.

philipat's picture

Sure, may as well buy everything with money from thin air. Then what?

HardlyZero's picture

France tried this three centuries ago to finance their government, and I doubt anyone forgets the follies of John Law.


The Mississippi Bubble (1718-1720):

Not only would Law advance the use of paper money, the French word millionaire would come into use as a result of his most famous scheme — the Mississippi Company. 

In 1716 Law convinced the French government to let him open a bank, the Bank Generale, that could issue paper money, or bank notes. The paper notes would be supported by the bank's assets of gold and silver and would circulate as a medium of exchange. Paper money was a new concept for the French; money to them was silver and gold. Law believed that paper notes would increase the money in circulation, which, in turn, would increase commerce. These conditions would help revitalize and rehabilitate the finances of the French government. 

In August 1717, he organized the Compagnie d'Occident (Company of the West) to which the French government gave the control of trade between France and its Louisiana and Canadian colonies. In Canada, the French would trade in beaver skins. In the Louisiana colony they would trade in precious metals. 

The colony stretched for 3,000 miles from the mouth of the Mississippi River to parts of Canada.

Cruel Aid's picture

We need to do this in order to get back to free markets.

You are with us or you wil be targeted and crushed.

U4 eee aaa's picture

Don't try to bend the markets. Only realize there are no markets.

-The Matrix comes to Wall Street

KnuckleDragger-X's picture

I've got a scenario running through my head of a Strangelove type Fed war room with Yellen demanding equity purchases to prevent a "mineshaft gap".......

Amish Hacker's picture

Gentlemen, gentlemen! You can't fight in here. This is the War Room.

ImmodestExtant's picture

There's a reason why a nice house like this would be listed at 39k. Nobody wants to live in MeckPom, and certainly not in a place like Wittenburg. You'd lose all your beautiful helicopter money! I'll use mine as downpayment for a loan for a helicopter - it's helicopter money, after all. I will then graciously allow my lender to create a new asset class -helicopter-backed securities - that they can sell to unsuspecting pension funds. Then, I will lend the helicopter to one of our politicians, with only a small maintenance problem that will show itself after 7 minutes of flight, when it will crash and burn. Of course, I will buy a helicopter default swap prior to the flight from a large insurance company.

Haus-Targaryen's picture

I hear this all the time about Meck-Pom --- no one wants to live there.  

The problem is people have been living there for ... well, thousands of years.  

But from an Immo perspective, there is a hole in the market.  

First, about 12% of all inhabitants of MeckPom live in structures that were built between May 1945 & 1960.  These Soviet Structures had lifespans between 70-80 years.  This mostly had to do with the non-load bearing exterior walls made of sub-par watered down concrete.  (The soviets like to use higher concentrations of concrete on load bearing parts of the buildings).  

Now, while perhaps there are a few buildings in Rostock where it financially makes sense to renovate as oppose to demolish, in places like Wittenburg where rent is already in the neighborhood of 5€ per square meter per month -- when these soviet building reach the end of their life expectancy, they have to have their occupancy permit revisisted absent a Kernsanierung.  Herein lies the problem.  

Due to the undesirability of these buildings right now, landlords in smaller cities and towns have to undercut market rate (which is already through the floor) to fill them.  When these buildings require extensive modernisation, it will not be financially viable to invest €2m renovating a Q3A  building in a market where rent is 5€ per square meter.  Thus, when the central heating breaks, and it costs something stupid to replace it, the owner of the GmbH HoldCo simply declare the GmbH insolvent and wrap it up.  In Germany bankruptcy law, if a landlord is going through bankruptcy and any rented premises he owns becomes "Unbewohnbar," there is no recourse for his tenants.  Their leases are terminated and they can move out as they wish.  

One could attempt to sell the building, which some have tried to do, but experiences thus far show that the continued maintenance costs of these structures quickly exceed income in off-prime rental areas, such as any Germany city in the former East with a population with less than 80k, which seems to be the "break-even" point, although this process will get really aggressive in cities with less than 15k people.  

You have to remember that these people aren't just going to go "awe fuck it, lets go to Berlin" --- although some will, many will stay because of family, jobs, agriculture, etc., etc., These people will have to move somewhere, and the current "fad" at the moment is the reurbanization of these old cities.  

The house is cheap because it is Denkmalgeschutzt needs work, and is having to compete with Platten.  In the next 5-10 years millions of square meters of Plattenbau is going "offline" and as I said -- these people have to go somewhere. 

If the government saves these buildings by putting refugees in them, the Germans that are in them now will flee all the faster, accelerating this process.  

Believe it or not, buying "Schrott-Immo" in Stadtkerne in these smaller cities is a pretty good idea given helicopter money & demographic shifts over the next couple decades.  

ConfederateH's picture

Great explanation.  I have to would pay 10x as much in Switzerland... anywhere except maybe Canton Jura.

ConfederateH's picture

Looks like a steal.  Are you planning on renting to rapefugee's?  If you aren't, do you think there will be reliable German renters when the neighborhood gets infested?

Even in Switzerland one must now consider the demographic death spiral before making long term investments.

Haus-Targaryen's picture

Yes, the rapeugee crisis is a factor in my thought process.  

If these animals are allowed to stay in civilization (aka Germany), then once they all get "official" they will self-congregate into ghettos, every large city will have one, and there will be American style "white flight" from the city centers out to towns and villages surrounding the cities.  

As we have seen, the invaders do not like these small villages as there is "nothing to do" (remember 80% are men between 18 and 35) and thus they head into the cities.  Thus, I anticiapte lots of people fleeing out to the villages that surround the cities for safety, good schools, etc., etc.,  

That is if Europe doesn't hit repeat on its 2000 year story and kill them all, which I think will be the ultimate outcome as lets be honest, its how Europe always solves its problems.  

ConfederateH's picture

Sounds good to me as long as the area remains uninfested or unconquered, especially if you have heirs.  That kind of real property is certanly better than bank deposits based on derivatives of PIGS sovereign debt.

I can't see how the unarmed and untrained populace will rise up against the elites and conquer them and thier orcs.  I am afraid Europe is down for the count, unless somehow it once again discovers the will to survive.  That simply won't happen until Europe can pry the jews claws from around their necks, and that won't happen as long as the jew controlled ECB exists.

Hitler had better odds, and losing a war against the jews is a very poor option.

Haus-Targaryen's picture

I am quite optimistic re; Europe, and when I talk about Europe I meant the continent, not the political system.  

First, Europe to do well again requires the political and fiscal implosion of the United States.  It isn't that Europe cannot compete, its just that the US never gave up control of Europe after the USSR failed, like Russia gave up of Eastern Europe.  Until the US collapses, Europe is just a large vassal state.  

It also will require a good dose of poverty.  

Those two things, so long as the population doesn't choose fullon blow hard DDR/SED style socialism as its answer, and Europe will come back stronger than ever.  

Its just gonna have to go through a lot of pain to get from A to B.  

noless's picture

i was definately expecting a gun.

PT's picture

-.- :

Me too.  I'll borrow as much money as they like.  And spend some of it.  As long as they buy all the debt from me so I don't have to pay it back.

It would be sooooo much faster than waiting for me to SAVE money.  I got projects I need to work on!

Cognitive Dissonance's picture

I cleared a spot in the woods for the helicopter drops. Don't want bags of money falling on my house or squishing the cat.

PT's picture

Lots of people are suffering right now becoz I don't buy the stuff they are selling!  If only I could have munny without first saving, imagine how many jawwwwwwbs I could create!

U4 eee aaa's picture

If you securitize the cat, it won't be a problem

Bangin7GramRocks's picture

Crack Head Bob says, "Dits Darty Dime!"

BandGap's picture

So people go ape shit when China talks about doing this, buy all is well when the ECB floats virtually the same idea through JPM/Goldman?

Normalcy Bias's picture

Their worst enemy is the free flow of information on the internet, outside of the MSM (State Media), People far and wide are learning just how badly they're getting screwed by these Central Banking systems.

"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." - Henry Ford

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning. Henry Ford
Read more at:
Shad_ow's picture

Look for this to stop and soon!  With either President Hillary or Trump we are going to be submissive or there will be war here in the mainland.

Shad_ow's picture

Look for this to stop and soon!  With either President Hillary or Trump we are going to be submissive or there will be war here in the mainland.

And who says we can stop the One World Governance?

BadKiTTy's picture

@ Uncle Sugar - they already do! 

Canadian Renegade's picture

Uncle Sugar, hasn't that always been the plan?

Reminds me of Brer rabbit story. "please don't throw me in the briar patch!"

Central bankers, "we really don't want to buy stocks but we have to, to save the world. See its for your own good we buy everything up with money created from nothing."

bid the soldiers shoot's picture

What shall it profit a banker if he shall gain the whole planet and lose his depositors?

ForWhomTheTollBuilds's picture

"the ammunition the ECB has expands hugely."


This is the key point.  Don't listen to people to tell you "They are out of ammo".  


Central banks are never, EVER out of ammo unless the people refuse to hold their liabilities.  Then when that happens, the central banks order their governments to order the people to hold them anyway.  Then the supply lines break.  *Then* maybe we can start talking about the central bank being "out of ammo".


Keep an eye on the stock of gasoline and toilet paper.  Until that runs dry nothings going to change.

mvsjcl's picture

They equities they buy will be of the "chosen" companies.

PT's picture

For example, bankrupt builders.  But they will only bail out builders who build homes that nobody can afford to buy.

MsCreant's picture

But that would make em' like China, building ghost developments. They wouldn't do that would they?


Suspended animation.

Put all your productive energy into keeping your balls in the air.

Let nothing settle, take no loss on anything. 

End result?

Lose everything.

It almost appears like there is nothing left to build, so they have to keep fluffing the illusion.

The truth is you can't build anything new when you prevent creative destruction. 

PT's picture

We have empty houses stuck haphazardly all over the place.  The Chinese neatly stack all their empty houses into empty cities.

It is so important that we give munny to bankrupt entities so lots of people can build lots of over-priced stuff that no-one can afford to buy so it can sit there doing nothing until it is demolished!  The alternative would be to build stuff that people can afford to buy but then people might have nice things and then take the rest of the week off and we can't have that!

Quick!  Work hard and build stuff you can't afford to buy!  It's goood for the eCONomy!  Oh, and don't forget to max out your credit card!  How can we repossess your stuff if you don't go bankrupt?  You need to work harder!

lester1's picture

The Federal Reserve already buys equities. They just have not publicly announced it yet. The Fed is indeed propping up the stock market and oil futures market.


What's to stop them ?

Battleaxe's picture

Why go through the exercise of creating money, buying stocks to boost the market, blah, blah, blah? They could just take control of the market scoreboards and add as many points as they want whenever they want.

Like they do with the elections.

Canadian Renegade's picture

The want to own everything so they buy it. Just changing the numbers means someone else owns it at a higher price.

CAPT DRAKE's picture

Betting against the tape is always a bad idea. Get in, make money and be happy.  

This QE type activity will move from place to place, never ending until the stench of it reachs heaven.   There is simply nothing in place to stop it.   

No Half Measure's picture

And this is news, only because they are now admitting to what has been going on in the back rooms of banks (central and commercial) for years!

You cannot tell me with a straight face that this run up in oil is "market driven".  Pure bullshit!!!!!