Monday, January 26, 2015
On Thursday, January 22nd Mario Draghi, the President of the European Central Bank, kept ECB rates unchanged AND announced monthly purchases of €60 billion until September 2016. This includes about €10 billion under existing programs so essentially €50 billion in new buying.
20 months @ €50 billion equals €1 trillion in purchases. The bulk of which will be government bonds of the largest economies – Germany, France and Italy.
The ECB will coordinate the program but most of the buying will be done by national central banks.
Although scheduled to end in September 2016, the ECB left the door open for further purchases if necessary.
In anticipation of this announcement Germany’s two-year rate dropped to minus 0.182 percent, the lowest since Bloomberg began collecting data in 1990. German debt due in four years or earlier all presently yield less than zero. A negative yield means that investors will get back less when the debt matures than what they paid. The Euro dropped to its lowest level since November 2003 and has continued lower to the current $1.1254 (presumably on the victory of Syriza’s anti-austerity party in Greece).
Figure 1 – EUR/USD courtesy stocktwits
Some observations from our market note of January 20th – Padding the Runway:
* We mentioned that the European Union was formed to appease Germany and prevent another World War. We continue to hold that point of view and believe a Greek exit will not occur. In fact the New Greek government has said they will be tough in negotiations with the EU but have not promised to leave the Union.
* We mentioned that European Equities were leaning towards a period of out-performance versus US Equities. That trend has continued post QE announcement and the scorecard for January is now:
It is interesting to see some emerging markets (China, India) are benefitting – this reminds us of our January 5th note where we mention the rubber band has become too stretched in favor of large cap US stocks, US Treasuries and the US Dollar at the expense of emerging and international developed markets and commodities –such gap could close in 2015.
One prediction from last week’s article which has not yet panned out is a reversal of the Euro (higher). However – Goldman Sachs recently published a note explaining why a rate hike in the USA may be later than the consensus expects:
The $ has been rallying on the expectation of higher rates … so this note may turn a tailwind into a headwind. Perhaps that’s what is sending Gold prices higher?
Have a great week!
Greg Silberman CFA®, CAIA, CA(SA)
Chief Investment Officer
Advisory Services offered through Atlanta Capital Group.
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