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Stimulating Upside for (Some) Stocks

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The tug-of-war between weak economic data and stimulus from central banks is creating a polarized and unpredictable market. Here's how to navigate the next several months safely.

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Unlike the ESM, the ECB will not buy bonds directly from governments on the primary market, but will purchase securities from other traders on what's known as the secondary market.

By buying bonds, Draghi hopes to push down borrowing costs for floundering countries such as Spain and Italy. The ECB stated that it would buy bonds in unlimited quantities. By not setting a maximum bond purchase target, the central bank has made it tough for traders to bet against bonds issued by troubled European nations or the euro common currency itself.

The ECB announced OMT over significant German objections, but it made a few minor nods to German concerns. First, to qualify for OMT countries must already be working on a fiscal adjustment program and the ECB can terminate the program at any time if it feels countries aren't living up to their fiscal objectives. Second, the ECB will concentrate its purchases on bonds with one to three years left to maturity rather than longer-dated securities. Consequently, governments can't look at the ECB's bond purchases as a long-term financing vehicle.

The ECB will sterilize its bond buying, meaning that the bond purchases won't increase the total money supply in the euro zone. Historically, the ECB has sterilized its activities by offering banks short-term interest-bearing deposits. As banks park their excess cash at the ECB, it's temporarily removed from the money supply.

Just the suggestion of unlimited bond purchases from the ECB was enough to send the yields on Italian and Spanish bonds back to their 2012 lows. That's despite the fact that neither Spain nor Italy has applied for help from Europe's bailout funds, which means these nations would not be eligible for support from OMT.
No positions in stocks mentioned.
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