Investment markets and key developments over the past week
Share markets had a good week driven by a strong quantitative easing (QE) program from the European Central Bank (ECB) along with good US data. This saw US shares gain 1.6%, Eurozone shares surge 5.5% and Japanese and Australian shares both up 3.8%. Chinese shares fell 0.7% though being hit earlier by a crackdown on margin trading. Bond yields fell sharply in peripheral Europe on the back of the ECB’s bond buying program which also pushed the Euro lower. The $A fell below $US0.80 for the first time since 2009 on increased expectations for an RBA rate cut. Oil and copper continued to fall.
The QE announcement from the ECB was well above expectations. Key elements of the ECB’s QE program are: €60bn/month in debt purchases involving both public and private debt out to September 2016 or until inflation is back on track; 80% of sovereign debt buying to be by national central banks but the remainder by the ECB resulting in partial loss sharing across Europe; and the Targeted Longer Term Refinancing Operation (TLTRO) cheap lending program sweetened by removal of a fee. While the low level of loss sharing on public bond purchases is a dampener this was necessary to get German support and in any case is more than offset by the sheer size of the program. The ECB is now set to expand its balance sheet well beyond the 2012 level or €1trillion of QE that President Draghi last year implied was the objective.
Source: Bloomberg, AMP Capital
With public debt now included there is little doubt that this can be achieved. And the open ended nature of the program, ie until inflation gets back closer to target, puts it on a par with the Fed’s successful QE3 program. As in the US, it is expected to work by boosting inflation expectations, displacing investors from low risk assets into higher risk assets and so boosting the availability of capital and asset values, helping support bank lending and via a lower than otherwise euro.
In short, the ECB’s move gets the thumbs up. The scale and open ended nature of the QE program provides significant confidence that Eurozone deflation will not be sustained and that growth will get back to a firmer footing. This is good news for the global economy. So it’s no surprise shares rallied and it makes sense to continue overweighting Eurozone shares.
For Australia, the ECB’s move is good news as it should help global economic growth and particularly China given that the Eurozone is its largest export market. While it is likely to reinforce demand for Australia’s higher yielding and highly rated government bonds, coming on the back of a surprise interest rate cut by Canada it highlights that global deflationary forces remain intense and require further monetary easing and so Reserve Bank of Australia (RBA) rate cut expectations have been given a further boost.
As expected the IMF followed the World Bank in revising down it global growth forecasts, but this tells us nothing new. The IMF’s 3.5% growth forecast for 2015 is now in line with our own expectation. What is perhaps most interesting in the IMF’s outlook is that in 2016 it sees growth in India exceeding that in China. Such a cross-over underlines how India will become increasingly important for investors.
Finally, the passing of Saudi Arabia’s King Abdullah is unlikely to change the outlook for oil prices with new King Salman likely to maintain current production levels as the country seeks to regain its long term market share.
Click here for the full article: Weekly Market Update – 23 January 2015