As certain key economic statistics are rising in the Eurozone, the European Central Bank (ECB) announced today that they were dropping interest rates “to ward of deflation.”
ECB also launches asset backed securities purchase plan
The ECB also announced they were engaging in asset backed securities, turning to a “quantitative easing” like stimulus program similar to that of the US Federal Reserve.
Although some reports initially called the move a “surprise,” ValueWalk reported yesterday the move into an artificial stimulus program was anticipated. We wrote: “Don’t be surprised to see quantitative easing (QE) across Europe,” pointing to a recent research note from Barclays. “The real issue will be the resulting impact on global markets.”
The move to artificial stimulus has a number of curious dynamics. As Rothschild recently pointed out, housing prices and growth numbers are “buoyant” yet “the ECB is still leaning towards easing rather than tightening,” highlighting how many inside the financial services industry were expecting the move but also wondering about its necessity.
One little reported aspect of the move is how it could impact U.S. economic growth as it pulls back stimulus. With a difficult road ahead, Fed chief Janet Yellen has the herculean task of reducing stimulus while hopefully not triggering a stock market sell-off. With the ECB engaging in stimulus, its markets could enter a new phase. As ValueWalk noted before the announcement, stimulus in the ECB could lead to a new market environment for European stocks as well as U.S. equities.
ECB: U.S. Economy to get a boost from rising European economy
A rising European economy could no doubt help a U.S. economy attempting to extract the needle of stimulus from its veins. Yellen is walking a tightrope as she attempts to remove the addicting cheap money sloshing around the economy that is easier to turn on than it will be to turn off.
On the announcement, the euro fell by over one percent to the dollar, adding to yesterday’s losses. Watch for this currency trend to continue and keep in mind the ECB does not have at its disposal the world reserve currency of choice backing up its artificial stimulative measures. Analysts have said the U.S. could not have engaged in such massive levels of quantitative easing if it did not hold the mantle of world reserve currency used in most international transactions. The benefit of this is that many central banks around the world are forced to hold dollar denominated world debt, increasing demand for not only the dollar but also U.S. government bonds.
Going forward, the Eurozone could be entering a new market phase, as ValueWalk noted yesterday. This could mean a boon for value stocks relative to growth stocks, with particular interest in the financials, industrials and certain consumer discretionary sectors. The key to an investment in the Eurozone is properly managing the currency risk, the likelihood of the euro entering a volatile market phase.