Friday, January 23, 2015

ECB Does Not Dissapoint

Over 1 Trillion Euros of QE
(only 550 million was expected).

  • As I have been suggesting, Central Banks do not like volatility because it erodes confidence in investors.
  • Yesterday, The European Central Bank surprised financial markets with a larger than expected dose of monetary stimulus.
  • Equity markets rose significantly on this news.
  • Volatility dropped.


  • Volatility, as measured by the VIX moved to 16.4 from its recent highs above 23.
  • The Euro/USD fell to lows not seen since 2003.


What Happens Next?

  • As the Bank of Canada did on Wednesday, The ECB has used surprise to stimulate markets. This has been a positive in the short-run.
  • However, the long-run impact is still to be determined.
  • What is hoped for is a move to higher levels of inflation at 2%.
  • This will be created on the back of stronger economic growth, but will likely take until 2016 to achieve, given the current global economic weakness.
  • In the interim, interest rates will remain low for a longer than expected period, especially in Canada, the Euro area and Japan.
  • An "unspoken" currency war has begun with all countries trying to lower the value of their respective currencies vs. the $US to enhance export growth.
  • In turn this will likely have a mildly restrictive impact on the US economy and impact US corporate earnings negatively (especially for companies that have a global sales reach).
  • It may, as a result impact the timing of any US Federal Reserve interest rate increases.
  • All in, it should be positive for global growth, but it will take time and in the interim many questions will be asked.
  • For now, volatility is down, but in the short-term as market participants lose patience (and we know that many focus on a far too short time horizon for results) volatility will return and challenge the Central Banks once again.
  • Stay balanced, stay diversified.
  • my 60/40 model is up more than 2% on the year, being led by Emerging Markets (especially India) and Canadian REIT's. Interestingly, US equity markets have been flat.

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