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.