The head of the European Central Bank (ECB), Mario Draghi, reinforced the message that the central bank stands ready to support asset prices in the eurozone, like other major central banks in the developed world have been doing.
However, European stock were down and the euro was appreciating during the news conference, because he reiterated the message that the exchange rate is not a target for the central bank and that there is a limit to how effective negative interest rates are.
Despite this short-term reaction, the details that Draghi shared about the corporate bond purchasing program, which is due to begin in June, support the theory that no matter what the destination of newly issued debt, investors would do well to stock up on eurozone equities.
That's because companies will be encouraged to issue debt and either invest the proceeds in expansion, which should hopefully boost earnings, or use the money to buy back shares or raise dividends.
Both trends would be strongly supportive for companies in the euro area. I wrote before that one way for investors to take advantage of this would be to look at the companies that have issued debt and pick the most attractive.
The following criteria will apply to the central bank's corporate bonds purchases, according to Draghi's statements and the rules published on the ECB's website:
- the universe will be all non-banks and insurance companies that have a credit rating equivalent to BBB- or above ;
- corporations whose parent is not headquartered in the eurozone are eligible, provided they fulfill the other criteria and their bonds are denominated in euros;
- the maturity goes up to 30 years;
- the issue limit is up to 70%; in other words, the ECB can buy up to 70% of the issue;
- the purchases will contribute to the overall size of 80 billion euros ($90.4 billion) per month for the program (rather than being an addition to that);
- six national banks will be responsible for purchases from issuers and the ECB will coordinate the purchases. The six are: the Belgian National Bank, the Bundesbank, Banque de France, Banca d'Italia, Banco de España and the Finnish National Bank;
- the purchases will be conducted in the primary and secondary markets; debt instruments issued by entities that qualify as public undertakings will not be bought in the primary markets, as this is forbidden under eurozone rules.
Regarding interest rates, Draghi said he expects them to stay at "present or lower levels" for a long time. Asked whether he anticipated that interest rates could be cut again he essentially said that with negative rates, "the issue is not a yes or no, it's an issue of extent," as negative rates become less and less effective the lower they go.
However, he stressed that for the moment the negative interest rates for deposits that the ECB has imposed on commercial banks has not been passed on to depositors or borrowers.
In other words, the ECB would be reluctant to cut its deposit rate below the current -0.4%, but if the situation becomes dire, it will do it.
Another area that was closely watched by investors was the spat with Germany Finance Minister Wolfgang Schaeuble, who reportedly went as far as to partly blame the ECB's low interest rate policy for the rise of the right-wing party Alternative for Germany (AfD) in the recent local elections.
Draghi confirmed that the issue of political interference had been discussed -- "briefly", as he put it -- at the Governing Council's meeting this morning, and that the members were unanimous in their determination to defend the central bank's independence.
He said that Schaeuble clarified his remarks later on and that the German finance minister did not, in fact, blame the ECB for the rise of the extremist party. Draghi also stressed that the central bank's policies were appropriate.
"We have a mandate to pursue price stability for the whole of the eurozone, not just Germany. We obey the law, not the politicians, because we are independent, as stated by the law. All this applies to all countries, all politicians in the eurozone."
Moreover, he stressed that the ECB's policies "are not very different from policies that are being implemented in all the other important jurisdictions" and added: "Our policies work. They are effective. Just give them time to display their full effects."
As he spoke, European indices fell; but for investors with an appetite for risk, this could prove a good buying opportunity.