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Difficulty Souring Bonds Should Push to DAX to 15K

David Becker
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Difficulty Souring Bonds Should Push to DAX to 15K

A story on Thursday in the Wall Street Journal discussed the issues the European Central bank might experience when it attempts to begin its bond purchase program beginning in March of 2015. The issue is that although the bank has stated that it will be purchasing 47 billion euros worth of sovereign European bonds per month beginning in March, they will have a very difficult time finding bonds to purchase.

Rates are already extremely low in Europe, with 2-year rates below zero and 5-year rates just above zero although it dipped below zero earlier this year. Even though rates at extremely low levels, the only place for prices to go if the ECB is planning a huge bond purchase program is higher.

European stocks have been on a tear since the ECB announced its bond purchase program, but there is a lot more to come if you use the US as a test sample. Since announcing its open ending bond purchase program in September 2012, the S&P 500 index has climbed more than 60%. If the German DAX moved as much from the ECB’s bond purchase program the index would be testing levels near 15K.

The Euro will also need to move lower if European yields are in strong demand especially since both the US and the UK are on diverging paths. Although neither the US or UK is likely to increase interest rates in the near term, the US could change policy as early as September while short sterling contracts are targeting a UK rate hike in early 2016. If the ECB continues its path toward monetary easing, not only with stock prices soar to new all-time highs, but the EUR could dip to par against the greenback and to 0.70 against the pound.

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