Global share markets rose over the last week. Eurozone shares were up +3.2% given the European Central Bank’s (ECB) monetary easing and news of a ceasefire in Ukraine. Shares in Japan were up +1.6% and Chinese shares were up +4.9%. US shares rose modestly (+0.2%) as a softer than expected jobs report allayed fears of an earlier US Federal Reserve (Fed) rate hike. Bond yields generally rose, but yields in peripheral Eurozone countries continued to slide. The ECB easing saw the euro continue to slide with the rising US$ weighing on commodity prices, but the A$ remaining stubbornly strong despite a sliding iron ore price.
ECB announced quantitative easing (QE). In response to poor growth and the rising risk of deflation the ECB eased more than expected by announcing a 0.1% cut to its official interest rate taking it to just 0.05% and said that it will begin buying asset backed securities with the aim of expanding its balance sheet by €1 trillion. The ECB would not announce the details of its asset buying program until next month, but by indicating it will include mortgage backed securities and covered bonds it has effectively allowed a much larger scale program. It’s not US style QE as the ECB will not be buying government bonds (at this stage anyway), but it will have the same effect in pumping cash into the economy, displacing investors from relatively low risk investments and forcing them to take on more risk which will lower the cost, and improve the availability, of funding throughout the economy. And its latest rate cut will lower the cost of cheap four year funding for the banks to just 0.15% pa. Will it work? It will certainly help, particularly all the talk of money printing will head off a deflationary mentality taking hold.
Please click here to read full article: Weekly Report – 5 September 2014