ECB Announces Bond Buying Program While Oil Prices Continue to Drop

in Market Commentary by

Market Digest – Week Ending 1/23

On Thursday, the ECB announced a plan to buy €60 billion of bonds per month starting in March with a total expected buy of more than €1 trillion. Purchases will include government bonds. The action is intended to spur growth and stave of deflation in Europe. Stocks jumped on the news, while the Euro dropped to $1.12.

Weekly Returns:

S&P 500: 2,052 (+1.6%)
FTSE All-World ex-US: (+1.2%)
US 10 Year Treasury Yield: 1.80% (-0.02%)
Gold: $1,293 (+1.4%)
USD/EUR: $1.121 (-3.0%)

Major Events:

  • Tuesday – Oil prices dropped nearly 5% after the IMF lowered its global economic growth forecast.
  • Tuesday – Google was reported to be close to investing $1 billion in Elon Musk’s SpaceX.
  • Wednesday – The US revealed it about 6,000 Islamic State militants have been killed, including about half of its leadership.
  • Thursday – The ECB announced a massive bond buying program of €60 billion per month, exceeding expectations.
  • Thursday – Saudi Arabia’s King Abdullah died, raising questions about the new leadership’s plans for the oil market and international relations.
  • Friday – Shares of Box Inc. rose 70% in an IPO.

Our take:

Europe is often chided as slow to act. It is one of the perils of trying to conduct unified monetary policy among a group of independent nations. But, nearly six years after the US began “QE 1” (the first round of Fed asset purchases – we’ve since had QE 2, Operation Twist, and QE3), the ECB announced a €1.1 trillion bond purchase plan. Importantly, it overcame German opposition to include government bond purchases. The plan was bigger than expected. Bond yields fell and the Euro declined.

There is much debate if quantitative easing works – especially with already low (and negative in Germany) bond yields. But it is hard to argue that the US stock market rallied with QE and has tended to stall out in its absence. Meanwhile US economic growth has been solid and inflation low. Former Fed Chairman Ben Bernanke admitted part of his goal was to prop up asset prices, including stocks. So it is hard to argue that failed.

There is no way to know how QE will play out in Europe. Early indications are that it will keep pressure on the Euro, which is good for the European economy and potentially bad for US exporters, including many technology companies. Many have been scared of deflation, and this should help avoid it. Lower yields and a weaker Euro should also help Emerging Markets which benefit from lower comparative bond rates to fund their own growth.

With the dollar already up significantly to most global currencies, if you’ve been avoiding international investing in the last few years, it could be time to reconsider. For better or worse, Europe and Japan appear firmly committed to aggressive monetary policy just as the US is attempting to figure out how to tighten.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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