AMERIPRISE FINANCIAL, INC.
The Moment of Truth for the European Central Bank
01/21/2015 | David Joy
Once again, it is all about central banks.
Last week, the Swiss National Bank shocked everyone by abandoning its three year effort to keep the franc from appreciating against the euro and slowing its export-oriented economy. Its rationale for doing so was perfectly understandable. In light of the ongoing weakness of the euro, the cost of suppressing the franc was becoming increasingly expensive. And in light of expectations that the European Central Bank (ECB) is about to launch a program of quantitative easing, the Swiss strategy threatened to become even more expensive.
Central banks change their minds. It happens. But recent statements from officials at the Swiss National Bank strongly suggested the strategy would continue. As a result, many investors were caught off guard, and on the wrong side of the rise in the value of the franc, which surged 20 percent versus the euro immediately following the announcement last Thursday. Even International Monetary Fund Managing Director Christine Lagarde expressed surprise at the news, saying policy coordination is preferred.
The ECB Takes Center Stage
This week the ECB meets amidst widespread expectation that it will announce a program of sovereign bond purchases. Assuming the details of a program are forthcoming on Thursday, how well received it will be will depend on its size and the degree to which it shares the risk of loss throughout the Eurozone.
The bank has made it clear that it wants to increase the size of its balance sheet to a level that would necessitate the purchase of sovereign debt. Investors would prefer that any quantitative easing (QE) program be open-ended in terms of size, consistent with the idea of doing "whatever it takes." Short of that, an initial program of 500 billion euros, to be followed by a second of similar size, seems to be the minimum below which there will be widespread disappointment.
The second issue concerns whether the purchase of individual member country bonds will be reflected on the books of their own central banks, or on the balance sheet of the ECB. The former strategy leaves the risk with the issuing country, and represents a far less formidable commitment to true fiscal integration, while the latter pools the risk among all Eurozone members and represents a much stronger commitment to risk sharing.
Both elements of a potential QE program have their supporters as well as detractors at the ECB, making it difficult to predict exactly what might be proposed. Investors expecting something big and bold are positioned for Eurozone equities to receive a boost, and bond yields, especially at the periphery, to move lower. The euro should also remain under pressure and the dollar, by comparison, should continue to firm. But what the ECB will announce, and how effective it will be, remains unclear.
Upcoming Meetings for the Bank of Japan, Federal Reserve
The Bank of Japan meets this week, with no new policy announcements expected, after having already announced a sizeable increase to its own stimulus program several weeks ago.
Next week, on Jan. 27 and 28, the Federal Reserve meets. It has already made it clear that no change in policy is likely at this meeting, or the following meeting in March. Since its meeting in December, U.S. economic data has been somewhat disappointing, enough so to push investor expectations of the first rate hike until well into the second half. Home sales, retail sales, average hourly earnings, consumer prices, factory orders, industrial production and the ISM indices have all moved lower. Both stock and bond prices are higher since that Fed meeting, signaling some relief that policy will remain on hold for at least a while longer. Next week's meeting is likely to offer statement language similar to December's, and unlikely, therefore, to offer much by way of surprise.
For now, it is the ECB's turn on center stage. Will it bask in the spotlight and deliver a powerful performance, or will it disappoint by refusing to be bold? Investors with positions in stocks, bonds, commodities and currencies alike are eager to learn the answer.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
01/21/2015 | David Joy
Once again, it is all about central banks.
Last week, the Swiss National Bank shocked everyone by abandoning its three year effort to keep the franc from appreciating against the euro and slowing its export-oriented economy. Its rationale for doing so was perfectly understandable. In light of the ongoing weakness of the euro, the cost of suppressing the franc was becoming increasingly expensive. And in light of expectations that the European Central Bank (ECB) is about to launch a program of quantitative easing, the Swiss strategy threatened to become even more expensive.
Central banks change their minds. It happens. But recent statements from officials at the Swiss National Bank strongly suggested the strategy would continue. As a result, many investors were caught off guard, and on the wrong side of the rise in the value of the franc, which surged 20 percent versus the euro immediately following the announcement last Thursday. Even International Monetary Fund Managing Director Christine Lagarde expressed surprise at the news, saying policy coordination is preferred.
The ECB Takes Center Stage
This week the ECB meets amidst widespread expectation that it will announce a program of sovereign bond purchases. Assuming the details of a program are forthcoming on Thursday, how well received it will be will depend on its size and the degree to which it shares the risk of loss throughout the Eurozone.
The bank has made it clear that it wants to increase the size of its balance sheet to a level that would necessitate the purchase of sovereign debt. Investors would prefer that any quantitative easing (QE) program be open-ended in terms of size, consistent with the idea of doing "whatever it takes." Short of that, an initial program of 500 billion euros, to be followed by a second of similar size, seems to be the minimum below which there will be widespread disappointment.
The second issue concerns whether the purchase of individual member country bonds will be reflected on the books of their own central banks, or on the balance sheet of the ECB. The former strategy leaves the risk with the issuing country, and represents a far less formidable commitment to true fiscal integration, while the latter pools the risk among all Eurozone members and represents a much stronger commitment to risk sharing.
Both elements of a potential QE program have their supporters as well as detractors at the ECB, making it difficult to predict exactly what might be proposed. Investors expecting something big and bold are positioned for Eurozone equities to receive a boost, and bond yields, especially at the periphery, to move lower. The euro should also remain under pressure and the dollar, by comparison, should continue to firm. But what the ECB will announce, and how effective it will be, remains unclear.
Upcoming Meetings for the Bank of Japan, Federal Reserve
The Bank of Japan meets this week, with no new policy announcements expected, after having already announced a sizeable increase to its own stimulus program several weeks ago.
Next week, on Jan. 27 and 28, the Federal Reserve meets. It has already made it clear that no change in policy is likely at this meeting, or the following meeting in March. Since its meeting in December, U.S. economic data has been somewhat disappointing, enough so to push investor expectations of the first rate hike until well into the second half. Home sales, retail sales, average hourly earnings, consumer prices, factory orders, industrial production and the ISM indices have all moved lower. Both stock and bond prices are higher since that Fed meeting, signaling some relief that policy will remain on hold for at least a while longer. Next week's meeting is likely to offer statement language similar to December's, and unlikely, therefore, to offer much by way of surprise.
For now, it is the ECB's turn on center stage. Will it bask in the spotlight and deliver a powerful performance, or will it disappoint by refusing to be bold? Investors with positions in stocks, bonds, commodities and currencies alike are eager to learn the answer.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
Ameriprise Financial Services, Inc. Member FINRA and SIPC.
© 2015 Ameriprise Financial, Inc. All rights reserved.
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