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DGAP-News: Silvia Quandt & Cie. AG, Brokerage & Investment Banking: In-between the lines - Bernhard Eschweiler (deutsch)

Veröffentlicht am 14.09.2012, 10:41
Silvia Quandt & Cie. AG, Brokerage & Investment Banking: In-between the lines - Bernhard Eschweiler

DGAP-News: Silvia Quandt & Cie. AG, Merchant & Investment Banking /

Schlagwort(e): Sonstiges

Silvia Quandt & Cie. AG, Brokerage & Investment Banking: In-between

the lines - Bernhard Eschweiler

14.09.2012 / 10:40

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- This was not the last time Karlsruhe had to rule on Euro-area

legislation

- Full sterilization of OMTs has no impact if ECB provides banks

unlimited liquidity

- Growing market optimism is mostly but not only policy driven

The German High Court rejected the complaints against the ESM yesterday as

'fundamentally unfounded'. In summary, the court stated that the degree of

Germany's fiscal involvement in response to the Euro crisis is a political

and not a legal decision as long as par-liament is in control and

contractual liability limits are binding. The court further stated that

the conditionality is implicitly met and only urged the government to make

it more explicit. The ESM has now the green light. How soon it will get

started, however, remains unclear. Clear is that this was not the last

time the German High Court had to rule on Euro-area legislation. The

crisis is by far not over, more coordinated action and legislation is

likely to follow and the road to Karlsruhe is easy.

ECB is ready but may not act soon

The market reaction to the Karlsruhe ruling was positive but not euphoric

as a favorable outcome was widely expected. Much more euphoric was the

market reaction to last week's ECB announcement. The ECB surprised markets

positively in three ways:

- First, the fact that the ECB outlined the modalities of its new bond

purchase program (OMT) at all. We as well as much of the market had

expected a delay until after September 12.

- Second, the statement that OMTs will be ex ante unlimited in size.

Previously, ECB president Draghi talked about adequate size.

- Third, the announcement that the maturity range will be up to three

years. Earlier, ECB president Draghi described the new bond purchases

as a form of money market operations, which would imply a maximum

maturity of one year.

A potentially negative (but not much noticed) surprise for markets was the

statement that OMTs will be fully sterilized. Earlier statements by ECB

president Draghi suggested that the operations would not or only partially

be sterilized. Full sterilization is probably a concession to those ECB

council members who worry more about inflationary implications. The

question is whether unlimited bond purchases can have the desired effect if

they are fully sterilized. The answer depends on the type of sterilization

and the overall monetary policy stance.

Strictly speaking, sterilization means that one operation is offset by an

opposite operation on the same side of the balance sheet so that the

overall size of the balance sheet remains unchanged. An example would be

if the ECB reduces the lending to banks by the same amount as the bond

purchases. Balance-sheet-neutral sterilization is sometimes used for FX

interventions, but undermines their effectiveness. Anyway, this is not

what the ECB has done to sterilize the SMP operations in the past. The ECB

has chosen a softer form of sterilization. It has absorbed the extra

liquidity created by the bond purchases on banks' ECB current account by

auctioning one-week term deposits (see box on previous page). In that

case, the balance sheet expands but banks cannot immediately spend the

extra money. Success of that operation depends on the interest rate that

the ECB offers to banks. Despite a few failed auctions, this sterilization

has technically worked (see table on previous page) and is probably what

the ECB will do with the OMTs as well.

In practice, the sterilization effect depends critically on the overall

monetary policy stance. In the first year of the SMP, the ECB has tried to

normalize its policy (interest rates). The balance sheet shrunk by nearly

5% as increases in gold and FX reserves as well as domestic securities were

more than offset by a 45% reduction in lending to banks (see table on

previous page). After June 2011, ECB policy has been reversed. In

response to the collapse of the interbank market between the periphery and

the core the ECB has provided unlimited liquidity with longer maturities

and softer collateral standards and cut interest rates. Since then, the

ECB balance sheet has expanded 63% as lending to banks has surged 185%.

Without that policy shift, the Euro would most likely have collapsed. As

long as the ECB maintains this accommo-dative stance, which is what we

expect, full sterilization will not hamper the effectiveness of OMTs.

The ECB may be hoping that the announcement of ex ante unlimited bond

purchases will be enough to stabilize markets and that it never actually

needs to activate OMT. Indeed, the honeymoon may last a while, but sooner

or later stress is set to reemerge. Greece, for example, may trigger the

next round of market volatility and cause renewed trouble for Spain. Would

Spain then request and get EFSF/ESM support? In our judgment, Spain will

eventually request help just as it did in June, but only in form of a

precautionary credit line. First, the Spanish government will do anything

to avoid large additional reforms. Second, German support for a full

package is very unlikely, given its potential size and what that means for

the resources of EFSF and ESM. Spain is widely viewed as compliant and

approval of a precautionary credit line is likely. Nevertheless, a fierce

debate in Germany is pre-programmed as approval automatically implies

giving the ECB the green light for potentially unlimited bond purchases.

Once a Spanish program is approved, which may take a while, we expect the

ECB to act fast and squeeze the market. That is the only way the ECB can

hope to restore orderly market conditions without having to be permanent in

the market.

Market sentiment beats business confidence

The ECB has contributed significantly to the turn in market sentiment, but

it is not the only driver. Markets turned first after the Spanish bank

recapitalization program in June and the subsequent EU summit. Moreover,

good news came not only from the Euro area. In the US, there is a growing

sense that the fiscal cliff will look more like a speed bump and the Fed

seems ready to launch another round of quantitative easing. China is also

easing both fiscal and monetary policy and there are more signs of policy

easing across both developed and emerging markets. Yet the growing market

optimism is not having much impact on business sentiment so far. Indeed,

most output and labor market indicators support the growing business

pessimism and highlight the risks ahead.

Nevertheless, the global economy is in our judgment at a turning point.

First, global demand dynamics, especially consumption, is improving.

Global car sales, for example, are up about 17% from last year with no

visible fading of momentum in recent months. Second, the growing

impatience of policymakers with the poor growth performance is triggering

ever more aggressive policy responses and in aggregate may well lead to an

overreaction. To be sure, market sentiment is fickle and can flip

quickly and risks that the economic slowdown gains more momentum are

plenty. Yet, we believe that chances are larger that policy action and the

private-sector response will produce stronger growth, especially going into

2013.

Disclaimer

This analysis was prepared by Bernhard Eschweiler, Senior Economic Advisor,

and was first published 14 September 2012, Silvia Quandt Research GmbH,

Grüneburgweg 18, 60322 Frankfurt is responsible for its preparation. German

Regulatory Authority: Bundesanstalt für Finanzdienstleistungsaufsicht

(BaFin), Graurheindorfer Str. 108, 53117 Bonn and Lurgiallee 12, 60439

Frankfurt.

Publication according to article 5 (4) no. 3 of the German Regulation

concerning the analysis of financial instruments (Finanzanalyseverordnung):

Number of recommendations Thereof recommendations for issuers to which

from Silvia Quandt Research investment banking services were provided

during

GmbH in 2012 the preceding twelve months

Buys: 73 25

Neutral: 56 8

Avoid: 10 0

Company disclosures

Article 34b of the German Securities Trading Act (Wertpapierhandelsgesetz)

in combination with the German regulation concerning the analysis of

financial instruments (Finanzanalyseverordnung) requires an enterprise

preparing a securities analysis to point out possible conflicts of interest

with respect to the company or companies that are the subject of the

analysis. A conflict of interest is presumed to exist, in particular, if an

enterprise preparing a security analysis:

(a) holds more than 5 % of the share capital of the company or companies

analysed;

(b) has lead managed or co-lead managed a public offering of the

securities of the company or companies in the previous 12 months;

(c) has provided investment banking services for the company or companies

analysed during the last 12 months for which a compensation has been or

will be paid;

(d) is serving as a liquidity provider for the company's securities by

issuing buy and sell orders;

(e) is party to an agreement with the company or companies that is the

subject of the analysis relating to the production of the recommendation;

(f) or the analyst covering the issue has other significant financial

interests with respect to the company or companies that are the subject of

this analysis, for example holding a seat on the company's boards.

In this respective analysis the following of the above-mentioned conflicts

of interests exist: none

Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG, and its affiliated

companies regularly hold shares of the analysed company or companies in

their trading portfolios. The views expressed in this analysis reflect the

personal views of the analyst about the subject securities or issuers. No

part of the analyst's compensation was, is or will be directly or

indirectly tied to the specific recommendations or views expressed in this

analysis. It has not been determined in advance whether and at what

intervals this report will be updated.

Equity Recommendation Definitions Silvia Quandt Research GmbH analysts rate

the shares of the companies they cover on an absolute basis using a 6 -

12-month target price. 'Buys' assume an upside of more than 10% from the

current price during the following 6 - 12-months. These securities are

expected to out-perform their respective sector indices. Securities with an

expected negative absolute performance of more than 10% and an

under-performance to their respective sector index are rated 'avoids'.

Securities where the current share price is within a 10% range of the

sector performance are rated 'neutral'. Securities prices used in this

report are closing prices of the day before publication unless a different

date is stated. With regard to unlisted securities median market prices are

used based on various important broker sources (OTC-Market).

Disclaimer This publication has been prepared and published by Silvia

Quandt Research GmbH, a subsidiary of Silvia Quandt & Cie. AG. This

publication is intended solely for distribution to professional and

business customers of Silvia Quandt & Cie. AG. It is not intended to be

distributed to private investors or private customers. Any information in

this report is based on data obtained from publicly available information

and sources considered to be reliable, but no representations or guarantees

are made by Silvia Quandt Research GmbH with regard to the accuracy or

completeness of the data or information contained in this report. The

opinions and estimates contained herein constitute our best judgement at

this date and time, and are subject to change without notice. Prior to this

publication, the analysis has not been communicated to the analysed

companies and changed subsequently. This report is for information purposes

only; it is not intended to be and should not be construed as a

recommendation, offer or solicitation to acquire, or dispose of, any of the

securities mentioned in this report. In compliance with statutory and

regulatory provisions, Silvia Quandt & Cie. AG and Silvia Quandt Research

GmbH have set up effective organisational and administrative arrangements

to prevent and avoid possible conflicts of interests in preparing and

transmitting analyses. These include, in particular, inhouse information

barriers (Chinese walls). These information barriers apply to any

information which is not publicly available and to which any of Silvia

Quandt & Cie. AG and Silvia Quandt Research GmbH or its affiliates may have

access from a business relationship with the issuer. For statutory or

contractual reasons, this information may not be used in an analysis of the

securities and is therefore not included in this report. Silvia Quandt &

Cie. AG and Silvia Quandt Research GmbH, its affiliates and/or clients may

conduct or may have conducted transactions for their own account or for the

account of other parties with respect to the securities mentioned in this

report or related investments before the recipient has received this

report. Silvia Quandt & Cie. AG and Silvia Quandt Research GmbH or its

affiliates, its executives, managers and employees may hold shares or

positions, possibly even short sale positions, in securities mentioned in

this report or in related investments. Silvia Quandt & Cie. AG in

particular may provide banking or other advisory services to interested

parties. Neither Silvia Quandt Research GmbH, Silvia Quandt & Cie. AG or

its affiliates nor any of its officers, shareholders or employees accept

any liability for any direct or consequential loss arising from any use of

this publication or its contents. Copyright and database rights protection

exists in this publication and it may not be reproduced, distributed or

published by any person for any purpose without the prior express consent

of Silvia Quandt Research GmbH. All rights reserved. Any investments

referred to herein may involve significant risk, are not necessarily

available in all jurisdictions, may be illiquid and may not be suitable for

all investors. The value of, or income from, any investments referred to

herein may fluctuate and/or be affected by changes in exchange rates. Past

performance is not indicative of future results. Investors should make

their own investment decisions without relying on this publication. Only

investors with sufficient knowledge and experience in financial matters to

evaluate the merits and risks should consider an investment in any issuer

or market discussed herein and other persons should not take any action on

the basis of this publication.

Specific notices of possible conflicts of interest with respect to issuers

or securities forming the subject of this report according to US or English

law: None

This publication is issued in the United Kingdom only to persons described

in Articles 19, 47 and 49 of the Financial Services and Markets Act 2000

(Financial Promotion) Order 2001 and is not intended to be distributed,

directly or indirectly, to any other class of persons (including private

investors). Neither this publication nor any copy of it may be taken or

transmitted into the United States of America or distributed, directly or

indirectly, in the United States of America.

Frankfurt am Main, 14.09.2012

Silvia Quandt Research GmbH

Grüneburgweg 1860322 Frankfurt

Tel: + 49 69 95 92 90 93 -0

Fax: + 49 69 95 92 90 93 - 11



Ende der Corporate News

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14.09.2012 Veröffentlichung einer Corporate News/Finanznachricht,

übermittelt durch die DGAP - ein Unternehmen der EquityStory AG.

Für den Inhalt der Mitteilung ist der Emittent / Herausgeber

verantwortlich.

Die DGAP Distributionsservices umfassen gesetzliche Meldepflichten,

Corporate News/Finanznachrichten und Pressemitteilungen.

Medienarchiv unter http://www.dgap-medientreff.de und

http://www.dgap.de

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