Rumor has it the ECB “is mulling buying around €50bn-worth of government bonds a month (alt) for between one and two years as part of its quantitative easing programme set to be unveiled on Thursday.” That could potentially increase the ECB’s balance sheet €600bn per year, and €1.2tn after two years. Then again, it may not increase the ECB’s balance sheet at all: the main argument now isn’t the size of QE, but whether or not individual national central banks will be responsible for sovereign bond purchases of their own government bonds (i.e. will each euro member share in the total risk to the eurozone, or just their own piece of the pie?). So you (and everyone else) may be wondering, how good will QE be for European equities? The WSJ doesn’t think it’ll be all that great: “For one thing, because European equities have already advanced by 50% since the worst of the eurozone crisis in the summer of 2012.” Also, “it’s worth bearing in mind that in Japan, equities are now up ‘just’ 40% since the Bank of Japan unveiled its QE policy as part of Abenomics in April 2013.” OK…it’s also worth bearing mind that the S&P 500 has returned 150% since December 2008 when the Fed first started purchasing $600bn worth of mortgage bonds. Merrill Lynch likes the lack of alternatives in Europe: “the pool of ‘safe’ dividend yielding stocks is put at half that of negative yielding eurozone debt. Were safe [dividend] stocks to play ‘catch up’ with bonds…the stocks concerned could double.” Also, what do you get when you combine €600bn per year QE with the Euroglut? Either way, pretty much everyone thinks the United States has the best tasting grass. (Well, almost everyone.) To be fair though, the grass probably does taste pretty good when you are locked in fear.
“This is not just an oil story…there is a common factor affecting all of these commodities: financialisation and the emergence of commodities as a financial asset which benefit whenever cheap dollar funding is available, and fall whenever dollars become expensive…The key point to takeaway: the drop in commodities may be supply/demand [agnostic] and more reflective of a global dollar liquidity shortage than anything else.” Furthermore, “cycles of USD weakness are different to other currency weakness cycles. USD weakness supports global financial assets by virtue of a diversification dynamic out of global safe haven. By contrast, USD strength, implies a pernicious and ongoing headwind to financial assets as investors reallocate into the safest assets that also happen to be appreciating in value.” Meanwhile, this oil story rhymes with history.
Just FYI, “the decision caught the market on the hop” is pretty applicable to all central bank announcements right now. “In a statement, the Bank of Canada said: ‘This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada,” but don’t get any weird ideas, alright? Canada is a net exporter of oil; “about 30 per cent of Canadian business investment is directly exposed to oil prices…the equivalent figure in the US is about 13 per cent.”
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