How quantitative easing will feed your bonus - or not
It's happening again. The Bank of England is re-engaging in quantitative easing. 75bn is being injected, starting next week. Analysts at Citigroup are predicting the final injection could be closer to 500bn.
The last time big QE happened in the UK was around two years ago. Starting in March 2009 and ending in early 2010, the Bank of England bought 200bn of gilts. Meanwhile, the Federal Reserve's last big bout of quantitative easing began with a $600bn Treasury bond buying programme from October 2010. This came to an end last June.
As we have noted before, QE can be a good thing for investment banking revenues, and by extension, investment banking jobs and investment banking pay. Meanwhile, and not entirely coincidentally, the end of quantitative easing has been met with a sad and substantial reduction in banks' sales and trading revenues and the likelihood of massive job and pay cuts.
So will this new round of QE ease the pain?
How QE could help
QE could be of assistance to your job and pay prospects in several ways.
1) It will increase gilt trading
In the first place, QE will be good for the gilt desks that intermediate the 75bn of government bond purchases.
"QE effectively happens through us," says a senior economist at one UK bank. "We act as a market maker in the gilt markets and this will mean a lot more trading activity."
2) It will increase equity prices
By driving down the yield on gilts and encouraging investors to look for returns elsewhere, QE drives up equity markets. Hence, yesterday the FTSE rose 3.7% on the news that it was happening.
Rising equity markets are generally a good thing for banking revenues. As Becking analyst Dirk Hoffman-Becking noted last year, historically banking revenues have been 90% correlated with the S&P 500.
Rising equity markets may also feed through to increased primary issuance, which may feed through to increased equity capital markets work for banks, which may feed through to higher revenues, which may mean fewer ECM bankers lose their jobs than looks likely at the moment.
3) It will increase corporate debt purchases
The same reasoning that suggests investors will sell their gilts at high prices and reinvest in equities, suggests they might start buying corporate bonds, thereby increasing credit trading and encouraging debt issuance.
"Initially you have the trading business associated with the specific quantitative easing transactions," says the economist. "And then you have the knock on effects - the money from QE ends up being recycled into wholesale markets in other forms, such as primary bond issues."
4) It will increase liquidity and raise risk appetite
"All banks are suffering from the tightness of the credit markets," says one UK banking analysts. "To the extent that QE alleviates that, they are going to benefit."
Why QE will make absolutely no difference whatsoever
On the other hand, seen in the context of the European crisis and alleged need for a multi-trillion bailout fund to stabilise the situation, QE is a mere wart plaster on a head wound.
"This is a stop gap measure that the UK has employed to help the inter-bank market and buy time for any resolution to the European problem that's coming down the pipes," says Simon Maughan, co-head of European equities at MF Global. "I don't see it stimulating trading revenues on its own."
Will it increase bonuses maybe?
"It's laughable to think that this would help your bonus this year," says Maughan. "All it does it to highlight the fact that things are dreadful and you won't be getting one."