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ECB Announces “Unlimited” Bond Buying Program… So What?

So the European Central Bank has decided that they are officially going to backstop Spain and Italy (and probably anyone else), provided they submit to the ECB’s version of responsible spending.  I won’t get into the details here, there’s plenty of other coverage for that.

Question is, who stands to benefit?  What asset classes stand to profit from such a move?

One word can cover that, and that word is “risk”.   Part of the reason that Euro zone has been such a risky investment is the huge amount of uncertainty surrounding the region.  The ECB formally stepping in and buying Spanish debt severely reduces the risk (I don’t think we can every really say “eliminates”) that Spain will slide into a debt crisis.  Which makes investing safer.  Which means money that was previously sitting on the sidelines waiting for a chance to jump in is now either jumping in, or about to.  Especially in the european banking sector.

However, by the same logic, expect traditional safe havens for money to take a hit as more and more money starts to get brave.  The US dollar and US government bonds for a start.

Also look for this to play out the same way in foreign currecies as well, where the US dollar is the haven of safety and stability, foreign currencies react in the opposite fashion, dropping as uncertainty increases, and gaining as stability grows.  Look for most currencies to gain vs the dollar as investors balls start to drop.

One more play that I would look to would be gold.  Gold, as we’ve covered before, does not increase due to inflation, but to the preceived risk of inflation.  With the ECB printing up more euros to buy bonds, the Euro money supply will begin to accelerate.  Whether this results in on-the-ground inflation or not depends on whether that money filters down to the people that spend it, or simply remains in the financial world, where it will cause asset inflation instead.  Either way, that threat is likely to push gold higher, at least over the short-term, until the effects of this bailout start to have an impact.  Don’t expect the gold rush to continue once it becomes apparent what’s going to happen with EU inflation rates.

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