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Following ECB meeting HL’s Susannah Streeter on latest round of bond buying and impact on banks

Banks in focus as the ECB gives another dose of medicine to the Eurozone’s economy

Susannah Streeter, senior investment and markets analyst, Hargreaves Lansdown:

‘’The European Central Bank is preparing to administer another dose of medicine to the Eurozone’s ailing economy by ramping up bond buying with the aim of lowering borrowing costs for governments still grappling with the onerous impact of the pandemic. Fresh lockdowns have derailed the fragile recovery across parts of the bloc and concerns about the effect of fresh spikes in bond yields had been growing. Although for the moment the Pandemic Emergency Purchase Programme will be left unchanged at 1.85 trillion euros, it will be stepped up over the next quarter. Yields on the 10 year German bund and Italian 10 year bonds fell to the lowest level in weeks, after the announcement. Most recent data in the US also showed inflation remains modest, which has seen the yields on 10 year treasuries also fall after spiking earlier this month.

Ultra-low yields have supported the boom in equities by driving investors towards growth stocks that offer strong returns, which helped stock markets reach heady recent highs. Signalling an intention to drive down yields yet again gave an immediate boost to European indices with the CAC 40, the DAX and the FTSE MIB all rising. But those gains tailed off as investors digested the downbeat assessment of the Eurozone’s fragile economy given by ECB boss Christine Lagarde. She warned that GDP was likely to contract again in the current quarter due to restrictions imposed due to the ongoing pandemic.

Banking stocks saw yet more declines with expectations that ultra-low rates will linger for longer, eating into the margins they can make on loans. Santander, Deutsche Bank and BNP Paribas all saw falls of around 2% by mid-afternoon.

Although European banks entered the pandemic in a lot better shape, with larger capital and liquidity buffers than they had in the global financial crisis in 2008, Covid 19 has still been a shock to the system. With the easing of restrictions still some way off for many countries, it could pose significant problems to banks with a high exposure to fragile sectors such as tourism and aviation. Rising unemployment could also mean it will be difficult for more borrowers to pay back home loans, potentially hitting banks with large mortgage portfolios.’’

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