Now that’s what I call “understatement.”
“It now seems plausible that uncertainty could remain elevated for some time,” Mark Carney, head of the Bank of England said today in his second televised speech since the United Kingdom voted to leave the European Union. “The economic outlook has deteriorated and some monetary policy easing will likely be needed over the summer.”
And with that the Bank of England has joined the Bank of Japan as the first two of the big global central banks to put stimulus to mitigate the damage from Brexit explicitly on the schedule. On June 28 Toshihiro Nikai, chairman of the Japan’s ruling party’s general council, proposed a 20 trillion yen ($196 billion) package to Prime Minister Shinzo Abe, the Nikkei newspaper reported.
An interest rate cut by the Bank of England would be a huge break with the bank’s policy since March 2009. That’s when the bank last cut interest rates to a record-low of 0.5%. Since then the bank has maintained that 0.5% was the lower bound for interest rates in the United Kingdom.
After the Brexit vote, however, that no longer seems to be the case with Carney’s speech today clearly indicating that the Bank could take rates lower if needed.
The pound didn’t much like the news. The currency is down another 0.76% today from the June 29 close.
Stocks, however, have react with enthusiasm as the FTSE 100 index is up 2.27% as of 1:50 p.m. New York time.
The Standard and Poor’s 500 stock index is ahead 0.97% as of that time. U.S. benchmark West Texas Intermediate crude was off 2.35% either on the news, which promises a stronger dollar (always the source of downward pressure on commodity prices) or profit taking after West Texas Intermediate rose to within kissing distance of $50 a barrel at $49.88 yesterday after plunging to $46.33 in the Brexit sell off.
The longer the financial markets thought about the actions announced by the European Central Bank today, the less impressed markets were. The STOXX 600 Europe Index had climbed as much as 2.5% during the day, but after peaking around 1 p.m., the index finished down 1.7% for the day. The French CAC 40 ended lower by 1.7% and the German DAX was off by 2.3% at the close.
The problem was that European Central Bank President Mario Draghi undercut, as far as the market was concerned, more forceful than expected action with his comments to reporters. The bank announced another 10 basis point cut to its overnight deposit rate to a negative 0.4% (as expected); raised the amount of assets it aims to buy each month to 80 billion euros from 60 billion (10 billion more than expected) and that it would add corporate debt to its potential purchases.
Nothing startling there but more than expected.
But Draghi then said that the central bank is done–at least for a while. “From today’s perspective, we don’t anticipate it will be necessary to reduce rates further,” he said. The package “is an adequate reaction to a weakening of the growth and price-stability prospects,” Draghi added. “We think the measures we took today are adequate to address the change in economic conditions that occurred since our last monetary policy meeting.”
Which seems puzzling since he also noted that inflation is expected to remain negative (deflation in other words but without saying the “d word) in the coming months but will pick up later in 2016. (Inflation in February was a negative 0.2%.) The central bank lowered its inflation forecast for 2016 to 0.1% from the 1% forecast in December. Inflation will climb to 1.3% in 2017 and then 1.6% in 2018.
Last time I checked the math 1.6% is still less than the 2% target the bank has set as a goal for its program of asset purchases. And the bank is now projecting that inflation will remain below that target through 2018.
The European Central Bank also cut it forecast for economic growth in the EuroZone to 1.4% in 2016. That’s below the 1.7% growth in GDP the central bank forecast in December. The EuroZone economy will grow by 1.7% in 2017.
So let’s see–inflation lower than the target and economic growth tepid into 2017. Yep, I can see why the European Central Bank announced that it was done for a while.
On the news the euro climbed to $1.1207 against the dollar–after falling by as much as 1.6% earlier.
The most important take-away to me from today’s announcement and the market reaction is that traders and investors are becoming increasingly skeptical about the ability of central banks to stimulate higher growth and to generate higher inflation.
The bag of tricks announced today by the European Central Bank didn’t contain anything new and the same old, same old–even more of the same old, same old–doesn’t have the old magic that it once did.
Just about every reason I had to buy the iShares Currency Hedged MSCI Germany ETF (HEWG) back on March 12, 2015 has evaporated.
Weaker euro against the U.S. dollar to drive Germany exports higher? Nah.
Recovery in global growth to add to export earnings for German companies? Nah.
European Central Bank stimulus policies to add to economic grown in the EuroZone? Nah.
What do you do when all the reasons you have to buying and holding a position disappear? I don’t think there’s any thing else to do but sell. And that’s what I’ll be doing for my position in the iShares Currency Hedged Germany ETF tomorrow. I’m selling this position out of my Jubak Picks portfolio with a loss of 27.39% as of the close today, February 11.
This sell doesn’t mean the Germany economy won’t see better growth at some point in the future, or that China won’t see higher growth down the road and push the global economy toward faster growth, or that the Federal Reserve won’t raise interest rates in 2016 and lead the dollar back up against the euro.
It’s just that I see those trends taking a good while to get unlimbered. And when this current consolidation stage in the market does resolve itself into new market leadership, I think other stocks will show a faster rebound off the bottom than this ETF will. I am concerned at the persistent weakness in the European banking system and the length of time that it’s taking for that system to wash out its bad debts, but this sell is mostly not a sell because I believe that there’s still a tremendous drop ahead of German equities (German equities are already in the bear market) but because I believe that once the trend in the market does turn, there will be better opportunities elsewhere.
At the moment, I don’t know where those opportunities will be but I’m raising some more cash here so that I have the money to pursue them when that’s appropriate.
On my paid site CURRENCIES week has ended with a post “3 strong dollar, weak euro (and Brazilian real) picks”
For the last week or more on my paid site JubakAM.com I’ve been writing about currencies.
How long will the dollar rally go on?
What’s the bottom for the euro and what route will it take to get there?
Is the biggest looming danger in global markets right now a potential devaluation of China’s currency?
Today, I ended this string on currencies with a post giving three picks for a strong dollar/weak euro market. You’ll recognize one of the three–it’s the iShares Hedged Currency MSCI Germany ETF (HEWG) that’s in my Jubak’s Picks portfolio. The other two are Luxottica (LUX), a member of my long-term 50 stocks portfolio and (surprise) BRF (BFRS), a Brazilian producer of chicken and beef and packaged foods. The post offers some timing advice on when to purchase and, of course, much more detail on why these picks make sense to me now.
For that, though, you’ll have to subscribe to my JubakAM.com site. Tomorrow on that site I’n going to take a brief trip through the banking sector–remember bank stocks are supposed to do well when interest rates are going up, and then I’ll start a string on oil (with an explanation of what the Saudis were thinking when they led OPEC to do away with production quotas.)
That’s what I’m working on at my subscription JubakAM.com site. I think there’s some value to you in passing on the direction of my thinking about the market on that site. Hope so anyway.
Of course, there’s an ulterior motive to sharing this with you: If you decide that you’d like more detail on my JubakAM.com posts, I’m hoping that you’ll subscribe to my site at JubakAM.com for $199 a year. (By the way, you can get a full refund during the first seven days if you change your mind for any reason.)
On Thursday December 3 the European Central Bank will send deposit rates even further into negative territory, increase the amount of bonds that it buys each month, extend its program of asset purchases, and expand the range of assets that it buys—or maybe all of the above.
The financial markets will be waiting to see if central bank President Mario Draghi throws the kitchen sink at the EuroZone’s combined problems of slow growth and even slower inflation or if he keeps some policy options in reserve.
You should watch to see how the currency markets—especially that for the dollar and the euro—behave. Will we see the euro rally and the dollar drop on a sell on the news reaction? Or will the dollar keep climbing against the euro on a belief that a strong dollar is about to get even stronger after the U.S. Federal Reserve raises interest rates?
The euro fell another 0.3% against the dollar today to close at $1.0565. The EuroZone currency fell 4% in November and finished the month down 12.65% for the year.
To me it looks like the market has priced in much of the kitchen sink program and if that’s the case I think it’s likely that we’ll see a bounce in the euro here. There’s strong support for the euro near $1.04, a level that marks the March low for the euro. If Draghi gives traders much of what they expect on December 3, I’d expect to see the euro move up slightly on the theory that all the likely news is priced into the currency pair and that the move to $1.04 isn’t enough to stick around for.
That makes sense to me in the short term, but in the medium to longer term a euro bounce assumes that Draghi’s new dose of the same medicine that hasn’t worked very well to increase inflation and or growth will work this time. That seems questionable to me at best—why should more of the same work now when it hasn’t done much of anything over the last six months?
I’d expect to see a renewed downward trend in the euro not too long after any bounce as the dollar resumes its climb after the Federal Reserve finally raises interest rates in December (current odds better than 70%) or in early 2016.
If you’re looking to put on weak euro/strong dollar trade, I’d wait to see if we get a bounce on the news after Thursday and then look for a resumption of the euro’s decline and the dollar’s rise.