Morgan Stanley: Full-Blown Quantitative Easing May Be Needed To Save Europe, And We Could Still See 1987 Redux

A possible way to read last week’s sharp post-bailout rally, and then the subsequent selloff, is that markets were initially enthused by the ECB’s intervention on bond markets, but then dispirited once they realised that this was not quantitative easing.

All bond purchases will be sterilized, said Jean-Claude Trichet, meaning that on net the bond buying won’t add liquidity to the system.

The lack of QE means that Europe didn’t really engage the nuclear option, and decided to leave one crucial weapon in the tank.

Now everyone assumes that it’s only a matter of time before Trichet fires that last bullet off.

Indeed Morgan Stanley’s (MS) Euoprean strategy team lead by Teun Draaisma remains bullish, but acknowledges: “It is possible that the crisis worsens and that this correction is only over when the ECB  announces full-blown QE, unsterilised buying of government bonds in size.”

The team sees two paths. The first is the most likely, and that’s a resumption of the upward trend.

bull market

Photo: Morgan Stanley

But…

bull market

Photo: Morgan Stanley

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