As the bull market rages on, many investors are “scanning the horizon” for reasons to sell the rally. From a technical perspective, we have already highlighted the (almost never before seen) low levels of realised volatility across asset classes. Also of note, average cash balances have reduced over the last year and (according to the Merrill Lynch fund managers’ survey) are now at 4.7% (the lowest since May 2015). More fundamentally, we continue to bang the drum of a goldilocks global economy with low inflation keeping monetary policy loose.
This week we have an ECB meeting at which we expect a change to the current quantitative easing program. As a reminder, the current commitment is to purchase EUR 60bn per month until December 2017. Given recent messaging from the governing council, we would expect a market friendly outcome that balances a reduction in size of purchases against a longer time horizon. This is likely to be between EUR 20bn-40bn per month for between 6-12 additional months.
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