But Draghi failed to deliver … and that released a massive wave of volatility in world markets. The key question, then, is what’s next for markets?
First, let’s talk about what the European Central Bank did. It …
Reduced the deposit rate to negative-0.3% from -0.2%;
Extended Euro-QE through March 2017 or “beyond if necessary,” compared with a previous projected endpoint of September 2016;
Announced plans to reinvest principal and interest payments on bonds it has in its portfolio;
Expanded the list of bonds eligible for purchase to include regional and local government bonds, rather than only national government securities.
|The eurozone didn’t get what it wanted out of the ECB today.|
But the 10-basis-point cut in the deposit rate failed to meet the expectations of some investors, who wanted as much as 20. Draghi also did not boost the monthly pace of Euro-QE, which is currently running at 60 billion euros a month. Several reporters asked why, pointing out that the markets were disappointed and expecting more, and he didn’t have very satisfying answers.
The result: The euro soared almost five cents against the U.S. dollar from intraday low to high – the biggest rally since early 2009. European bond yields jumped, dragging U.S. yields along for the ride, and European stocks plunged.
U.S. stocks swung all over the map — with the Dow Industrials opening in the green, then dropping 100 points, then rallying back into positive territory. But ultimately, stocks couldn’t hold up – and the Dow tanked around 250 points.
Another factor added to the volatility ahead of tomorrow’s key jobs report: The ISM services index came in at a disappointing 55.9 in November. That was a notable deceleration from 59.1 in October and well below the average estimate of economists. A separate consumer confidence index compiled by Bloomberg sank to a one-year low of 39.6.
So what are my thoughts here? Where do markets go next?
I believe today shows how Mario Draghi and Janet Yellen are continuing to lose control of the markets. This constant game of over-promise/under-deliver, lead/follow market expectations, hike/don’t hike, print more/print less is eroding confidence, increasing volatility, and otherwise making the markets a more dangerous place to invest, not a safer one.
|“Mario Draghi and Janet Yellen are continuing to lose control of the markets.”|
I also believe the downside economic risks are growing, what with the ISM manufacturing index at its lowest level in more than six years and services momentum decelerating. To me, the risk is greater that growth slows more than expected rather than accelerates substantially.
I don’t see how that is bullish for stocks. Neither is the ongoing deterioration in the credit markets, which I’ve harped on for several months. Punch up a chart of the SPDR Barclays High Yield Bond ETF (JNK) and you’ll see it’s trading at 49-month lows.
Or look at some of the stocks most sensitive to leveraged credit and easy money, such as the private equity and hedge fund stocks. Names like KKR & Co. (KKR), Fortress Investment Group (FIG), and Blackstone Group (BX) can’t get out of their own way — with all of them peaking in the spring, hardly bouncing at all during the recent rally, and now threatening to break to fresh mutli-year lows.
My advice, therefore, is to continue to exercise caution … hedge … keep elevated cash levels … and otherwise handle your money differently now than you might have in the six-plus-year bull market.
But that’s just my take. What’s yours? What do you think of what Draghi said or did this morning, and its potential market impact? Are we still poised for a year-end rally and run into 2016 on the backs of easy money? Or is that process played out, and the downside risks greater than the upside opportunities? Let me hear about it below.
Just how strong is the U.S. jobs market … and what does that mean to the economy and stocks? Several of you weighed in on that topic overnight.
Reader Richard said: “I am absolutely confused. The oil industry alone has let go 250,000 people this year. Almost every day there is another report of a company laying off people from 220 at Deere (DE) to Caterpillar (CAT). The list goes on. Thousands more lost their jobs this year.”
Reader D picked up on that message, saying: “You have to take these numbers with a grain of salt. There’s a major birth-death adjustment for small and medium-size business hiring, and in the first and second announcements, it’s fuzzy math. It takes several years, with better data, to really get a handle on things.
“It is clear now, for example, that the growth and jobs numbers of 2013 and 2014 were inflated. The semi-final revisions make it all look more modest than it seemed at the time. I strongly suspect that 2015 will be similar: Inflated numbers now, plus Wall Street hype, followed by later disappointing revisions.”
Reader Bob C. expects the tone of jobs reports to deteriorate going forward, saying: “Employment is the most lagging economic indicator of all. It reflects the economy last summer. It’s the last indicator the Fed should be paying attention to here. Manufacturing is in recession now. That’s the most important indicator the Fed should be watching.”
Speaking of the Fed, Reader DD said: “A rate hike would collapse the global economy and drive down reported profits for U.S. multinationals that get more and more revenue from overseas.
“But it’s not Janet Yellen’s fault. Rates should have gone up two years ago. Instead, Ben Bernanke chickened out, leading to massive amounts of capital flowing to bad investments.”
Thanks for the input. I gave my analysis of the current economic and policy situation earlier, and would love to hear if you agree or disagree. So please make sure to add any additional comments you might have below.
We’re learning a lot more about the latest tragic mass shooting, this time in San Bernardino, California. The two suspects have been identified as Syed Farook, 28, and Tashfeen Malik, 27, a married couple with a 6-month-old daughter.
Farook worked for the county health department for a half decade, attended a holiday party at the Inland Regional Center, left, and returned armed with rifles and handguns. After shooting the place up, they fled in an SUV that police tracked down. Both were killed in a subsequent gun battle with authorities. Authorities are now trying to identify a motive, and determine whether the suspects had any terrorist links.
The U.K. has begun to bomb ISIS in Syria, joining the U.S.-led campaign after a vote in Parliament that authorized additional military action. France and Russia are among other nations attacking various targets on the ground.
Saudi Arabia will only cut its oil output if other OPEC nations and countries outside the cartel do so as well. But neither Iraq nor Iran appear ready to play ball, nor does Russia — and of course, U.S. producers aren’t going to take their marching orders from the Saudis. So an OPEC output cut seems unlikely to come out of tomorrow’s Vienna meeting.
Let me know your thoughts below on these or any other topics.
Until next time,
P.S. Are you pondering what you should be doing now to preserve your wealth in a world gone mad?
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