PMC Weekly Review - January 23, 2015
A Macro View – The ECB Takes Action
While an inordinate portion of the week’s attention shifted to the deflation of footballs in the NFL, the real story of the week in finance-land was the emphatic move of the European Central Bank (ECB) to halt deflation in the economies of the Eurozone. Long expected yet still larger than anticipated, the move announced by the bank’s head Mario Draghi will be the European version of the same quantitative easing undertaken by the U.S. Federal Reserve bank until last year. Whether it will succeed in jolting moribund European economies, it is certainly a sign that those economies are in need of jolting.
And regardless of the macro-economic effects, these policies will mean that the financial world should remain fairly flush with money. That does not mean that stocks will go up, but it does provide the conditions for equities to continue their steady rise, and may lead to some long-expected outperformance of European and non-U.S. shares. These moves also suggest that even if the U.S. Fed does modestly raise short-term interest rates come the summer, global rates and sovereign yields look to stay very low for the foreseeable future.
The operative word here is “foreseeable.” We know that the world remains awash in liquidity. We know that low yields are a global phenomenon. We know that most national economies are seeing modest or mediocre growth, such that 7.4% growth in China (lower than at any point since 1990) and about 3% growth in the United States appear impressive. We know as well that conditions favor continued equity gains and continued low yields.
As for what is not foreseeable, that list is and will remain long. The unexpected effects of the upcoming Greek election; the ever-present threat of destabilizing terror acts; the arduous U.S.-Iranian negotiations over nuclear power; North Korea; plummeting oil prices leading to defaults and instability; too much sovereign debt and not enough sovereign growth. Complacency. All there, but hard to shape a portfolio that specifically attends to these risks.
Meanwhile, equity markets erased most of their losses for the year on the heels of this liquidity, and earnings reports for the fourth quarter of 2014 showed much that was expected, including weakness in many banks. But there were no major earnings surprises (yet), and that too has been a positive.
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