We do not often write about equities
here at OmiCronFX, but of course they do have a bearing on Foreign Exchange
rates. Even if certain influential economists, including some that are members
of the FOMC, do not regard equities as part of the “real economy” and therefore
to be disregarded when monetary policy is being made, the fate of stocks on the
world exchanges have to be noted.
Now the Standard and Poors 500 (S&P
500) share index in the US has fallen below its 200 Day Exponential Moving
Average (EMA). This is the first time this has happened since early 2012. The
Dow Jones index is behaving in a similar fashion, but it is the S&P that is
watched by the really serious traders. Very tellingly, the last dip below the
200 Day EMA for the S&P was also around the time of the ending of QE2 in
the US. Then QE3 started and the indices took off again.
At the end of 2013 the former Fed
chief, Ben Bernanke, let it be known that so-called tapering of QE3 was about
to begin. Equities reacted to the downside but recovered when it became apparent
that the Fed was not quite sure about it all. Now they are. QE is coming to an
end, once and for all, this month.
It has long been a belief in some
circles that the bull run in equities was fuelled more by the availability of
cheap money to institutions that QE provides, rather than fundamental
valuations and earnings. PE ratios are elevated. Are we now seeing the inevitable
consequences of the low interest rate money tap being tightened?
Mario
Draghi at the IMF / World Bank meeting
Mario Draghi, President of the ECB,
gave a press conference over the weekend to mark the end of the IMF/ World Bank
meeting in Washington. He reiterated that current measures being taken by the
ECB were aimed at increasing inflation, to close to but not above 2%. He stated
that it was not the policy of the ECB to manage the Euro exchange rate.
However, it is our belief that the measures being taken to increase inflation will
have the effect of lowering the Euro. This is particularly true in light of the
current US dollar surge and Mr Draghi did acknowledge that monetary policy in
the Eurozone and that in other major economies were on “divergent paths”.
The ECB measures involve the purchase
of covered bonds and Asset Backed Securities (ABSs) denominated in Euros, or in
other words growing the ECB Balance Sheet. While stopping short of describing this
as Quantitative Easing, he did point out that in the opinion of the Governing
Council it was effectively the last shot left in the locker of the ECB in this
regard.
He also talked about reform. When
asked what this would look like In practice, he cited the example of people in
certain areas of the Eurozone who, when wishing to open a shop, would be
required to wait up to nine months to get permission to do so and then face a
very high fee from the authorities for the privilege. This was a major disincentive to business. He did not say exactly
where it is going on but it is an interesting example of the need for reform,
as seen by the ECB.
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