ECB Rates = Print Print Print

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).

ecb euro exchange rate

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:

Business Insider world market performance through jan-23-2015

Figure 2Business Insider world market performance through jan-23-2015

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:

Zerohedge - Goldman Sachs Global Investment Research note

Figure 3 – Source: Zerohedge – Goldman Sachs Global Investment Research note

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

Greg Silberman CFA®, CAIA, CA(SA)
Chief Investment Officer

Advisory Services offered through Atlanta Capital Group.

Advertising- Index Disclosure
It is not possible to directly invest in an index. Financial forecasts, rates of return, risk, inflation, and other assumptions may be used as the basis for illustrations. They should not be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. The return and principal value of the investments will fluctuate so that, when redeemed, they may be worth more or less than their original cost. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.

Advertising- Opinions
Opinions expressed are subject to change without notice and are not intended as investment advice or a solicitation for the purchase or sale of any security. Please consult your financial professional before making any investment decision.

Advertising- The Standard & Poor’s 500 Index (but this could really be representative of any specific index that is discussed)
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to directly invest in an index. The return and principal value of the investments will fluctuate so that, when redeemed, they may be worth more or less than their original cost. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.

Advertising- Market Activity
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volumes. Technical analysis attempts to predict a future stock price or direction based on market trends. The assumption is that the market follows discernible patterns and if these patterns can be identified then a prediction can be made. The risk is that markets may not always follow patterns.

Advertising- Purchase of Securities with Prospectus
This information is neither an offer to sell nor a solicitation of an offer to buy securities. An offering is made only by the prospectus. This information must be read in conjunction with the prospectus in order to fully understand all of the implications and risks of the offering of securities to which the prospectus relates. A copy of the prospectus must be made available to you in connection with any offering. Past performance is no guarantee of future results.