Europe Gets Aggressive with Monetary Policy; Stocks Rise

in Market Commentary by

Market Digest – Week Ending 9/5

Unexpected stimulus measures from the European Central Bank, confusing truce talks in Ukraine, and a soft jobs report blended into mixed messaging for investors. Stocks struggled to find direction, but finished positive for the week, while bonds and most commodities declined. In an effort to stem deflation risk and encourage growth, the ECB cut its major lending rates by 0.1% and announced it will begin purchasing asset-backed securities. The Euro dropped to $1.29 per dollar, 14-month low.

Weekly Returns:

S&P 500: 2,008 (+0.3%)
FTSE All-World ex-US: (+0.5%)
US 10 Year Treasury Yield: 2.46% (0.12%)
Gold: $1,269 (-1.4%)
USD/EUR: $1.295 (-1.5%)

Major Events:   

  • Tuesday – The ISM manufacturing index in August rose to its highest level since 2011 Construction increased 1.8%, to its highest level in over five years.
  • Wednesday – Russian President Putin said he had agreed to the framework of a cease-fire between Kiev’s forces and pro-Russian rebels. Longer-term details were largely unclear.
  • Wednesday – Apple shares dropped 4% amid the announcement of two new Samsung Galaxy phones and security concerns about iCloud accounts after nude photos of Jennifer Lawrence were posted online.
  • Wednesday – Automakers continue to post strong results. Chrysler August deliveries rose 20% to the highest level in 12 years.
  • Thursday – The ECB cut its key lending rate to 0.05%, and announced it will purchase nearly 700 billion Euros of asset backed securities. It will not purchase sovereign debt at this time.
  • Friday – The US economy created 142,000 jobs in August, well short of expected. Unemployment fell to 6.1% as the labor force declined.
  • Friday – Shares of Tesla Motors fell 3% after CEO Elon Musk said the stock price was “kind of high”.

Our take:

The final impact of zero interest rates and massive asset purchases by the Fed won’t be known for a decade or more. So far, they seem to have helped the US economy regain its footing and escape catastrophe in the aftermath of the sub-prime crisis. Typically slower to react, the Euro-zone is now being more aggressive in following a similar path. Investors cheered this week’s rate cut and asset purchase announcement, with European stocks rising and bond yields falling.

It is worth noting Japan has been toying with similar tactics since their bubble-economy collapsed in the early 1990s, and with much less success. But for now, the ECB’s moves seem like a bullish driver for global stocks and could also help support bond prices, potentially proving wrong the consensus view that bond yields must rise.

According to Bank of America, 45% of the world’s government bonds now yield less than 1%. Coupled with low dividend rates, it’s a tough time for investors seeking yield. But cash is not a great substitute. Inflation remains subdued, but it can’t be ruled out as a possible outcome of unprecedented accommodative global monetary policy. It is a risk that should not be ignored. In a weird financial world, a healthy allocation to stocks and real estate may be the best defense for those with a longer-term view.

Image credit: Pixabay

The following two tabs change content below.
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.

Leave a Reply

Your email address will not be published.

Disclaimer. This communication and all data are for informational purposes only and do not constitute a recommendation to buy or sell securities. You should not rely on this information as the primary basis of your investment, financial, or tax planning decisions. You should consult your legal or tax professional regarding your specific situation. Third party data is obtained from sources believed to be reliable. However, PCAC cannot guarantee that data's currency, accuracy, timeliness, completeness or fitness for any particular purpose. Certain sections of this commentary may contain forward-looking statements that are based on our reasonable expectations, estimate, projections and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not a guarantee of future return, nor is it necessarily indicative of future performance. Keep in mind investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.