|Dow||+259.70 to 17,813.98|
|S&P 500||+31.03 to 2,063.15|
|Nasdaq||+82.98 to 4,750.40|
|10-YR Yield||+.043 to 1.896%|
|Gold||+8.30 to $1,302|
|Crude Oil||-1.21 to $46.57|
What Will the Impact Be on the Euro? Bonds? Stocks?
All eyes on Wall Street were focused on Frankfurt this morning. So what did European Central Bank President Mario Draghi deliver?
First, he said the ECB would launch a 60-billion-euro-per-month ($69 billion) QE program on March 1.
The program will initially run through at least September 2016, meaning it will ultimately total around 1.1 trillion euros ($1.3 trillion). But he also suggested at the press conference that it could become open-ended QE if it didn’t work.
Second, he announced that the ownership of the purchased bonds will be split by the ECB and national central banks. The idea is to force some of the risk of loss down to the individual countries that make up the euro zone in the hopes of spurring governments to take their own stimulus efforts.
|At his press conference today, Mario Draghi gave the markets a jolt with his version of QE and risk sharing.|
Third, he did not follow the path of other central banks like the Swiss National Bank or Denmark’s central bank, and lower all its benchmark interest rates into negative territory. The main refinancing rate was held at 0.05 percent, while a separate deposit facility rate remained at negative-0.2 percent.
So how did the market react? With a heck of a lot of volatility! The euro initially fell, then rallied, then fell again to as low as 1.343 against the dollar. Gold rallied sharply, then dipped, then rallied back again.
Long-term U.S. Treasury bond yields? They surged before the news, then fell after it, then rallied to finish the day slightly higher. Stocks were all over the map, too, rising sharply, then reversing lower, then reversing higher again to finish up more than 250 points on the Dow.
What does that tell me? Investors don’t know what the heck to make of the ECB’s latest gambit … especially because it’s coming on the heels of several other central bank surprises. That includes the surprise cut from Canada’s central bank yesterday, and the “Swiss Shocker” a few days before it.
|“These central bankers have NO IDEA what to do!”|
Oh and while we’re at it, Denmark’s central bank followed the ECB move by cutting its main deposit rate again — to negative-0.35 percent today. It had already lowered that rate to negative-0.2 percent from negative-0.05 percent on Monday.
Here’s what is clear to me: These central bankers have NO IDEA what to do! They’re throwing everything at the wall to see what sticks. They’re moving with increasing frequency. And they’re not even coordinating those moves anymore. It’s an all-out banker brawl, with investors like you caught in the middle.
I think it makes sense to dial down some risk as a result. I would also try to make sure you don’t get caught chasing any wildly overextended, one-way moves (cough … euro decline … cough) based on central bank promises that could be rescinded at a moment’s notice! Try instead to focus on individual stocks and sectors that offer distinct value, a strategy that gives you a nice cushion in a puffed up market.
Many of my specific ideas can be found in the Safe Money Report, which I hope you’re already reading. Or check out the Money and Markets website where readers like you are sharing ideas. And by all means, add your own to the mix in these volatile, central-bank-driven markets!
|Our Readers Speak|
Euro-QE. The U.S. dollar rally. President Obama’s State of the Union speech and the policies he announced during it. You’re commenting on all of them online!
With regards to the big European announcement today and its potential impacts, Reader G. Paul said: “The U.S. economy is doing better not because of QE 1,2, or 3. It is doing better because of massive spending (deficits), because our currency is a reserve currency, and because there is no other large economy doing better.
“EU QE and the Canada rate decrease will not impact their individual or global growth. These will only result in money flowing to the U.S., thereby lowering interest rates here. Borrowers will benefit as their interest costs come down. The effect will be temporary.”
Thanks, G. Paul. I’ve always said (in several Money and Markets columns and elsewhere) that the U.S. economy has improved DESPITE QE not BECAUSE OF it. It’s only natural to see a rebound after the biggest recession in decades, and QE does much more for asset prices than the underlying real economy. It’s the wrong medicine for what ails us.
As for Obama’s tax and spending plans, Reader James A. said there’s a mix of good and bad in there. His view: “He is right to want to tax the rich more than they are being taxed today. I would like to see the old progressive tax tables that existed during the Eisenhower Administration put back in force.
“I do not believe the President is correct in wanting to raise corporate taxes since they just get passed on to consumers anyway. Corporate taxes should all be cut in half to stimulate the economy. But, why should billionaires that get most of their income from dividends pay a lower tax rate than someone working at a hamburger stand?”
But Reader Roy M. thinks Obama should focus less on taxing the rich and giving to the poor, and more on a different potential solution for income inequality. His comments:
“The answer to income equality is education. Instead of income redistribution, which will not stand a chance of passing, why not focus on something that will? Support for improving our schools through incentives for teachers, parents and students.”
Finally, on relative moves in currencies, Reader Brian weighed in with the following: “I also have jumped away from the strength of the mighty dollar. I have enjoyed the calls on UUP, and am now awaiting the descent which I know is coming. I just wish I knew exactly when that was!”
Thanks Brian. It’s very tough to nail an exact turning point in any market. What I do know is that wildly overextended moves — coupled with wildly bullish or bearish sentiment — creates fertile ground for reversals or corrections. We’ll see if that happens here.
Anything else you would add to these discussions? Then don’t let those ideas just stew around in your head! Share them at the website so other investors can weigh in.
|Other Developments of the Day|
Google (GOOG, Weiss Ratings: C) entered the wireless phone business a few years ago, rolling out its Android phone software and Nexus phones. Now it plans to roll out wireless service under the Google brand name. Rather than build a network from scratch, though, it’ll be using networks from Sprint (S, Weiss Ratings: S) and T-Mobile US (TMUS, Weiss Ratings: C-) to carry the voice and data traffic.
Holy cow! Is that an actual bank merger deal I see? We haven’t seen too many of late because regulators are breathing down bank execs’ necks these days, making it difficult to get deals done. But Royal Bank of Canada (RY, Weiss Ratings: B) apparently decided it was worth the effort to launch a $5.4 billion bid for City National Corp (CYN, Weiss Ratings: B+).
Royal is the biggest Canadian bank by market value. City National is a Los Angeles-based bank with operations around California and four other states. The offer price of $93.80 in cash and stock represents a 26 percent premium to where CYN was trading before the deal.
Speaking of mergers, one of the biggest pipeline companies in the U.S., Kinder Morgan Inc. (KMI), just announced it would shell out $3 billion to buy Hiland Partners. Hiland runs oil and natural gas pipelines and processing systems in North Dakota and Montana.
The move looks like a big vote of confidence in the long-term outlook for the Bakken Shale energy formation — from one of the most savvy, long-term players in the U.S. energy business! It also raises the legitimate question of which other MLPs could be merger and acquisition targets. That could support valuations throughout the sector, which had been beaten down by the decline in oil prices.
Is the conflict in Ukraine heating up again? Sure looks like it after pro-Russian separatists drove the Ukraine army back in the area around Donetsk. The airport there reportedly has fallen to rebel forces.
Any thoughts on these topics? Others you’re reading or hearing about? Then share ’em at the website!
Until next time,