QE Begins in Europe
After months of hinting and speculation, the European Central Bank (ECB) finally embarked on a new quantitative easing (QE) program that is massive in both size and scope. QE by itself probably won’t solve Europe’s chronic economic malaise, though it should mitigate the risk of deflation and support European exporters through a weaker euro. The reach of the €1 trillion-plus program, however, extends beyond the continent; the impact will be evident in holding down global bond yields.
Monetary Policy, Two Ways
As we have discussed for some time now, central banks are taking increasingly divergent paths with their monetary policies. On the easing side, China, Denmark, India and others joined Europe and Japan in taking steps to address deflationary threats and bolster slowing economies. On the tightening side, besides Brazil and its three recent rate hikes, the Federal Reserve (Fed) is the only major central bank preparing to raise interest rates this year. As the disparity deepens, we expect markets to remain volatile, especially currency markets. Equity markets with central bank support are well positioned, such as in Europe and Japan, while challenging times could be ahead for those without such backing.
Cheaper Oil Is a Good Thing, for the Most Part
Another major shift to the investment climate has been the plunge in oil prices, which stirred up much market volatility and prompted questions about the strength of the world economy. However, prices seemed to have stabilized in recent weeks on reports of lower output, which could help ease some of the anxiety. Remember: Cheaper oil is a boost to consumer spending and global growth.
Opportunities in International Stocks, Credit
Given the market dynamics, it makes sense to look outside the United States for value, where central bank accommodation is keeping equity markets buoyant and where plenty of bad news is already baked into valuations. While investors continue to favor U.S. Treasury debt, we prefer the credit corners of the bond market that offer the prospect of higher income.