We closed our underweight in European equities but do not upgrade further as the ECB’s measures on itself are not enough. More measures are needed from a fiscal point of view as well as structural reforms – badly needed in countries like Italy and France.

## ECB policy benefits Eurozone financials and peripheral bonds

![](https://api.nnip.com/DocumentsApi/v1/images/RWS_A_098663/display)

## ECB clearly in easing mode

The ECB clearly surprised markets on September 4 by announcing a quantitative easing (QE) program. While the ECB is clearly in easing mode, on the other side of the Atlantic the Fed is slowly but gradually moving towards the ‘exit’. The US central bank is widely expected to complete the tapering of its asset purchasing program in October. The big question is then when it will start to hike interest rates. All eyes will therefore be on the meeting of the Fed’s Federal Open Market Committee (FOMC) this Wednesday the 17th. Our base case for a first rate hike is the third quarter of 2015.

## Scottish independence referendum: a close call

Another important event to watch this week is the referendum on Scottish independence, on Thursday. Recent polls suggest that the difference between ‘Yes’ or ‘No’ is very tight, which has caused uncertainty in financial markets to increase. Especially the Pound Sterling and interest rate hike expectations have fallen sharply over the economic and political uncertainty a “Yes” vote could generate. Our base case remains that it will be a “No” and the UK will be preserved intact.

## We upgrade European equities

Following the ECB’s latest announcement, we upgraded our position in European equities from underweight to neutral. The impact on financial markets was mostly visible in currencies as the euro fell back to its lowest level against the US dollar since April 2013. This should gradually filter through in Eurozone earnings expectations, which over the past month had fallen back to very low levels.

## Eurozone banks expected to benefit

The biggest beneficiary of the ECB measures may be the Eurozone banking sector. Funding costs are expected to come down, while carry trades (banks will use cheap ECB liquidity to buy peripheral government bonds) will help profitability. The ABS purchasing program will free up space on banks’ balance sheets, creating room for new bank lending.