|Dow||+39.05 to 17,554.28|
|S&P 500||+9.57 to 2,032.12|
|Nasdaq||+12.57 to 4,667.42|
|10-YR Yield||+.046% to 1.853%|
|Gold||-$0.60 to $1,293.60|
|Crude Oil||+$1.05 to $47.52|
Boy, are things heating up on the central bank front!
Earlier today, the Bank of Canada came out and shocked the market by cutting its benchmark interest rate 25 basis points to 0.75 percent. Not a signal economist predicted the move, which was its first cut since April 2009 during the depths of the Great Recession.
The BOC said it was buying “insurance” against risk — namely the fact that “the oil price shock increases both downside risks to the inflation profile and financial stability risks.” Canada is the biggest oil exporter among the Group of Seven nations, and policymakers are clearly worried the drop in prices from $108 a barrel to $45 could hammer its commodity-levered economy. The rate cut sent the Canadian dollar to a fresh six-year low against the greenback.
|BOC policymakers are worried the drop in oil prices could hurt its commodity-levered economy.|
Around the same time we were learning of that move, news leaked about what the European Central Bank is planning to do tomorrow. Both Dow Jones and Bloomberg reported that the ECB could launch a 50 billion-euro-per-month QE program.
That would run around an annual pace of 600 billion euros, or just shy of $700 billion at recent exchange rates. The news led to big intraday fluctuations in the euro, but traders appear to be unwilling to drive the currency dramatically higher or lower until they get more details.
Of course, these moves follow by just a few days the decision by the Swiss National Bank to abandon its currency peg with the euro. That led to the biggest rally in the Swiss franc on record, and caused billions of dollars of losses throughout the shocked currency market. And they come on the heels of a separate move by Denmark’s central bank on Monday to cut interest rates further into negative territory — to negative-0.2 percent from negative-0.05 percent.
So what the blazes is going on? Why are we seeing so many moves by so many foreign central banks?
I believe they’re worried sick about their economies, and the risk of domestic deflation and recession! While the U.S. economy has been holding in fairly well, despite some challenges, the euro-zone economy has been much sicker. That has infected close trading partners that use their own currencies, including Denmark and Switzerland.
At the same time, as the BOC noted, the collapse in crude oil prices has hit Canada’s financial markets and economy harder than other countries. So it felt it had to act in an attempt to stabilize things.
How will everything sort out? And what does all this central bank activism mean for your investments?
Well, we have been a primary beneficiary of all the monetary activism in foreign markets for several months now. Our currency, our stocks, and our bonds have risen in value because all that easy money has flowed here.
|“I’m putting more time and effort into evaluating beaten-down energy and materials stocks.”|
At the same time, you can make a very compelling case (as I have in the past couple of weeks) that these moves are getting very extended. That’s particularly true in our bonds and our currency. That makes the dollar vulnerable to a potentially major reversal — especially if the markets start to shift toward the view that all of these foreign stimulus actions will actually bolster their economic performance vis-à-vis ours!
So I’ve pretty much jumped off the incredibly crowded dollar bandwagon for now. I’m also putting more time and effort into evaluating beaten-down energy and materials stocks, which could hold incredible value and potential here.
As for you, where do you stand? What are you buying — or selling — because of this newfound activism in Europe and north of our border? Do you think these moves will work, in terms of helping their economies and encouraging investors to give their markets a second look? Or are they too little, too late?
Make sure you hit up the Money and Markets website to add your views to this debate. The results of this debate could dramatically impact the growth of your portfolio in the months ahead.
|Our Readers Speak|
Well, the State of the Union address last night delivered what I expected when it comes to economic policy. So what did you think of his proposals?
Reader Cy thought Obama was wrong to focus on policies that redistribute wealth from those who have worked hard for their success. His comments:
“Without the risk-takers of our nation, those that take the chance of starting new businesses and expanding existing ones, there would be no jobs for the ‘worker-bees!’ I am puzzled that the Democrats demonize these individuals and preach that they do not deserve to make more than the average wage when they become successful.
“Obama and his minions wish to punish success and take away as much of these entrepreneurs’ rewards as possible, giving perks and freebies to those that, in many cases, simply do not want to work!”
Reader TJ echoed a similar view, calling redistribution plans “nothing more than political shenanigans.” His other comments:
“The government takes from the rich, and then forgets to send it our way. Fact is, Congress has done nothing for the middle class and never will. The only way to build up the middle class is to create an environment where businesses are willing to hire workers and believe tomorrow is better than today.”
On the other hand, Reader Nat H. said it’s about time the government pivots toward a greater focus on average Americans. The view expressed at the website:
“Robin Hood-esque”? SO WHAT! That would be a very good thing for helping the middle class, by undoing at least SOME of the very ANTI-Robin Hood policies of the last decade(s).
“The middle class is the best economic engine and needs major help at this time; ‘trickle-down’ does not work, and will not work, especially given politicians’ ongoing efforts to give more and more to the top 1 percent at the expense of the middle class.”
Finally, Reader Chuck B. said he thinks at least some of Obama’s proposals are likely to resonate with Americans and make their way through the legislative gauntlet. His take:
“Obama seems to have some ideas that may be hard for the Republicans to parry. If he taxes the 1 percent and passes it on to the poor, he is merely reducing the incentive for bottom dwellers to try to move up. If he makes things better for those in the middle though, he gives the bottom more incentive, and moves the middle closer to the top. Maybe a bit more tax on the top, a bit less in the middle.”
It will certainly be an interesting few months ahead in Washington, that’s for sure. What can Obama ultimately push through? What alternatives can Congressional Republicans counter with that will attract mainstream voters? We’ll just have to see!
In the meantime, be sure to share any further thoughts you have on the matter here!
|Other Developments of the Day|
While we’re on the topic of the State of the Union, here is a Washington Post story featuring the pushback from Congressional Republicans. As a reminder, the GOP has a majority position in both the House of Representatives and the Senate.
What happened to AirAsia Flight QZ8501? Early analysis of the flight data recorder suggests the airplane rapidly ascended — at a rate much faster than it’s designed to do. Then it stalled out, and began to plummet toward the ocean surface. No link to terrorism is suspected at this time.
When will the Federal Reserve raise interest rates? That’s a subject of serious debate. I have maintained for some time that they should’ve started to do so already. But market sentiment has fluctuated over the past several months. Last fall, investors started pricing in a hike relatively early in 2015. Now, they’re pushing it out a bit further into the year.
We’ll learn more on the Fed’s view when it meets next week. Here’s one take from Bloomberg on what to expect.
Speaking of the economy, housing starts rose 4.4 percent in December to a seasonally adjusted annual rate of 1.09 million. Building permits dipped 1.9 percent to 1.03 million. If you exclude multi-family starts and permits, you see that single-family home construction is running at its highest pace in seven years.
Any thoughts on these topics? Others you’re reading or hearing about? Then share ’em at the website!
Until next time,