The People’s Bank of China cut its benchmark interest rate by 25 basis points to 5.35 percent Saturday night, its second move since November. It also lowered a separate lending rate Wednesday, and tripled the amount of money banks can borrow on a short-term basis.
The Reserve Bank of India cut its benchmark interest rate by 25 basis points to 7.5 percent Wednesday. That was the second cut in two months.
Poland, of all places, followed up later that day with a 50-point cut in its benchmark rate to 1.5 percent. That’s the lowest level in history, and it follows another surprise cut in October.
All told, we’ve seen more than 20 rate cuts overseas — in the countries just mentioned, plus those as far flung as Uzbekistan, Peru, Sweden, Israel and Canada. So just what the heck is going on? And what does it all mean for the interest rate, currency, and stock markets?
Central banks overseas are fighting a global war on deflation. You know about efforts by the Bank of Japan and the European Central Bank, because I’ve chronicled them for months on end here in Money and Markets. But these other moves make it clear we’re not just talking about two of the world’s “Big Three” central banks.
|The U.S. Federal Reserve has taken a different tack; strongly hinting that an interest rate hike is coming soon.|
The other Big Three bank — the U.S. Federal Reserve — has taken the opposite tack. It eliminated QE entirely several months ago, and has strongly hinted that the first interest rate hike in nine years is coming, soon.
That policy divergence, in turn, has led to a sharp dollar rally. And that rally has exacerbated the deflationary impulse in the commodities markets, putting even more pressure on these foreign economies and foreign central banks.
As you well know, I played along with this state of affairs for many, many months by shorting the euro and focusing almost entirely on domestically focused investments. But I began to change my tune in late 2014 and early this year, pivoting more to bargain hunting in sectors like energy and in select foreign markets.
Since then, the economic data has started to get better in Europe despite ongoing debt concerns in Greece and geopolitical tensions in Ukraine. This Reuters story notes that more than half of the key European economic reports released so far in 2015 have topped expectations. To pick out one example, euro-zone retail sales rose at a 3.7 percent annual rate in January. That was the biggest gain since 2005.
At the same time, the latest Fed meeting minutes showed the Fed is openly discussing the advance in the U.S. dollar. Those minutes noted that “the increase in the foreign exchange value of the dollar was expected to be a persistent source of restraint on U.S. net exports” — and that further gains in the dollar were viewed as a “risk.”
Some currencies are starting to break from the pack as a result. The New Zealand and Australian dollars have firmed up, while the British pound also hit a 2015 high before pulling back a bit. But the euro took another leg down yesterday after Mario Draghi and the European Central Bank held their latest policy meeting, and discussed the mechanics of Euro-QE with the media.
In other words, the currency and economic outlook is much more nuanced now than it has been in some time. These shifting sands and market developments tell me a couple of things …
First, investors may soon start to view these foreign rate cuts as not just negative for foreign currencies, but positive for growth in foreign economies.
Second, investors may be starting to appreciate that we’re going to see an increased pushback against an unfettered dollar rise here at home.
The bottom line result? Nibbling at stocks in cheap sectors like energy … and select foreign stock and bond ETFs … could pay off. I would also keep a close eye on developments in the currency market, because new opportunities are starting to open up there!
Until next time,