QE2

With the impact of QE1 fading, the market has been expecting QE2 in the form of expanding the Fed balance sheet by $500 million to $2 billion. ECB, BoJ and BoE are all expect to do the same. The use of quantitative easing help companies navigating a low growth rate environment with low funding costs. But it remains an experiment whose outcome is hard to predict.

Following the Greek sell-off earlier this summer, a sharp sell-off in Irish bonds over the past few weeks was triggered by negative news on its banks. The relatively small size of ECB purchases to date and the shortcomings of the EFSF could imply that the second round impact of austerity programmes in the PIGS could easily cause volatility, leading to further widening in sovereign spreads.