Week End Blog – Bazooka Time!

What was already widely expected became reality this week. The ECB announced a program of quantitative easing. And while truly impressive in size, It was also a bit different from the ‘programs’ that were ‘leaked’ in the days before the announcement. In short, starting in March, the ECB will make monthly purchases up EUR 60 billion at least until September 2016. To be clear, this includes the previous purchase programs aimed at ABS and covered bonds (not (T)LTROs).

But, in reality, a large part of that EUR 60 billion willl consist of government bond purchases, based on capital key. Draghi stated the program will last to September next year , BUT ‘in any case… until we see a sustained adjustment in the path of inflation.’ That last part should be considered as the most important aspect of the statement because it opens the door to a open-ending to the QE program. All in all, we now have a ECB QE (if we define all asset purchases as QE) program of at least EUR 1140 billion. Read the full Draghi press conference here.

One of the interesting questions that the European QE program raises, is whether it will make European stocks outperform. So far there has been a pretty strong correlation between the growth of the size of the balance sheet and equity returns. Read more about this here.  But, the one time that the ECB blew up its balance sheet  back in 2012 (when the balance sheet growth was also bigger than that of other central banks) European stocks did not manage to outperform. But it is fair to say that there is an important distinction between the LTROs in 2012 and the QE program that was announced this week.

The ECB became the latest European central bank in recent weeks that eased monetary policy. The SNB got things going when it dropped the Swiss franc cap against the euro, last week. It lowered interest rates at the same time in a rather foolish attempt to counteract the effect of the abandonment of the cap. The result, however, is that the Swiss 1-year bond yield is now below -1%. Yes -1%.

But that’s not all! Every Swiss government bond with a maturity between 1 and 3 years yields a negative return of more than 1%. So forget about the Japanification of bond yields, we now have Swissification!

Denmark, that has also pegged its currency to the euro, lowered interest rates as well. First on Monday, and then again on Friday. In between, the discussion flared up if Denmark was the next country to lose a battle with the market in defending its currency peg. Especially quotes like, “We have the necessary tools to defend the peg,” triggered investors. But in all honesty, Denmark is not Switzerland. First because its represents only a tiny part of FX trading (unlike Switzerland) and second this euro peg stands since 1982.

With one after the other central bank easing policy, there is one country that must feel very lonely right now. Brazil hiked its benchmark rate for the third consecutive time and already signalled this will not be the last time the rate goes up. Inflation expectations are clearly on the rise, and the Brazilian central bank really has no other option than to tighten monetary policy.

Let’s move over to Asia, where China did it again. It managed to report a 0.1% higher GDP growth than expected, +7.3%. It remains difficult what to make of it, really. Overall, the Chinese economy should be slowing given the correction in the real estate market and the attempt to control credit growth.

Slower Chinese growth going forward is what the IMF also anticipates. The January update of its World Economic Outlook reveals that in 2016 growth is expected to come in at 6.3%, compared to growth of 7.8% in 2013. Interestingly, the IMF revised growth upwards just a bit for advanced economies, but substantially lowered the forecast for emerging countries. Hence, the lower global GDP growth forecast is entirely explained by weaker expected growth in emerging countries.

The IMF also expects significantly lower inflation levels this year and next. And, again, the divergence between advanced countries and emerging countries is striking. In emerging countries (like Brazil already mentioned above) inflation is expected to go up. But, perhaps not all of the oil price effects are included yet.

The Chinese equity market is becoming are pretty volatile one. After a massive rally of over 50% in less than six months, Chinese stocks plunged more than 7% on Monday after Chinese regulators curbed margin investing. But losses were recouped almost completely just a few days later. Bloomberg dubbed the Chinese equity market as the ‘wildest’ one, but, as the graph below shows, that is not yet the case. Greek and Russian investors are stuck with far more erratic local stock markets than the Chinese.

Data from the US ware totally overshadowed by the central bank actions that took place in Europe. Let’s take a moment to look at the expectations surrounding the Fed’s monetary policy. Latest future data show markets expect the Fed to first hike rates in October. The timing does move a little from time to time,  but nothing has changed all that much in recent weeks. 2-year bond yields have come off quite a bit, though.

Two nice topics left to round off this Week End Blog. First, this week this world map circulated on Twitter showing countries resized to their population. Just have a look at Australia and Canada, if you are able to find them, that is.

Second, a real shocker. The Wall Street Journal posted this tweet, revealing that the most used password remains 123456. With all the debate that is going on about privacy, using more complex passwords is the least you can do people!

Thank you for reading the Week End Blog. Enjoy your weekend!

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