This week continued the trend of global central banks delivering statements that moved capital markets, with this the U.S. Federal Reserve Open Committee (FOMC) releasing their monetary policy report. Just to recap (and maybe to put into context) the month of January has seen the Bank of Canada unexpectedly cut its key overnight lending rate, the EU’s Mario Draghi announce a massive 60 Billion Euro per month Quantitative Easing program, Greek elect the anti-austerity party, and a surging U.S. Dollar.
All of this has kept the global financial markets remained in a digestion mode this week. Investors are still trying to figure out what the volatility in currency, commodity, bond and equity markets means going forward. Also, much uncertainty revolves around the future of Greece and its new populist government.
From TD economics, we received the following commentary:
“In Europe, following several weeks of fear-based selling, policy makers finally rode to the rescue, providing support to global financial markets. Mario Draghi and the European Central Bank (ECB) pledged to buy 60 billion Euro in assets per month, including sovereign bonds, as well as previously announced asset-backed securities and covered bonds. The program is intended to run at least to September 2016 or until the ECB sees a sustained adjustment in the path of inflation. This announcement exceeded market expectations leading to a further weakening in the Euro and a rally in bond markets across the euro zone.”
Our takeaway from this is the phrase “or until the ECB sees a sustained adjustment in the path of inflation.” One only has to look at the U.S. FOMC Quantitative Easing (QE) program to see that it was in place for longer than originally stated, with the same goal to re-inflate the economy. Therefore we will not be shocked nor surprised to see the ECB’s version of QE go well past September of next year.
By committing to asset purchases that will go on at least until inflation has moved closer to their 2% target, the ECB decision (much like the US FOMC’s) was meant to insure against a Japanese-style deflationary spiral which took its toll on their markets. Just as the U.S. capital markets took some time to react to the QE program, they eventually did, thus we would look for European assets to perform similarly over the coming years. Be they diversified, actively managed fixed income or equity managers such as RPIA or Picton Mahoney or via ETF’s offered by iShares or First Asset, investors with a timeframe of more than 2 years should do well by looking towards Europe at the present time.
Finally, much confusion persists about the Fed’s real intention and timing of the next rate hike. Economic data this week should keep the debate between the hawkish and dovish camps highly polarized owing to diverging directions between growth and inflation variables. But the variable that best captures the current level of anxiety is the Canadian dollar. So far in January, the loonie is down ~9%. This is the worst monthly decline since October 2008 (-12%) when the global financial crisis was unravelling. Interestingly, the C$ and oil prices are nearing 2008 lows as well.
Now we are certainly not trying to be alarmist, but rather point out that negative news creates volatility and with volatility comes opportunity.
This weekend we have Super bowl XLIX dominating the airways, and whether you are a Seahawks or Patriots fan it should be a fun game to watch. As such, we will conclude this week’s commentary with some Superbowl factoids and notes.
Seattle is the 9th team to try and win back to back Superbowls. Ironically enough the last team to win back to back Superbowls was the New England Patriots.
Superbowl XLIX is the first Superbowl since 2009 where both teams were their respective conference no. 1 seeds.
A 30-second commercial spot is estimated to cost $4 to 4.5 million. For the first Superbowl, the average cost of a 30 second commercial cost approximately $40,000.
The New England patriots are in the Superbowl for the 8th time. This ties the record also held by the Pittsburgh Steelers.
Whichever team it is that you are cheering for, have a great time with friends and family.
We thank you for the privilege you have bestowed upon us with taking care of you and your family. We thank you for that trust.
As always, we welcome your feedback. Have a great weekend.
The Dekker Hewett Group