AMERIPRISE FINANCIAL, INC.
As the Fed Normalizes Policy, Foreign Central Banks Head the Other Direction
11/24/2014 | David Joy
Three weeks ago it was the Bank of Japan that jolted the global markets with its surprise announcement of a sharp expansion of monetary stimulus. Last week, on Friday, it was the People's Bank of China's and the European Central Bank's turn, as the former unexpectedly lowered interest rates and the latter reiterated its commitment to supporting growth and raising inflation in the Eurozone.
Market reaction was pronounced. Stocks worldwide rose sharply, the dollar surged, while commodity prices rose despite the dollar's strength. The Euro Stoxx 50 index rose 3.0 on Friday, followed by a more modest gain of 0.5 percent in the S&P 500. The MSCI Emerging Markets index climbed 1.1 percent. Stocks in China rallied sharply in Monday trading. The euro gapped lower against the U.S. dollar, oil and industrial metals prices rose, and bond yields moved lower.
These central bank moves contrast sharply with the posture of the Federal Reserve, which is headed in the opposite direction and beginning the process of slowly normalizing policy. The U.S. economy is growing at a current pace of roughly 3.0 percent, and stands in stark contrast to the recession in Japan, a growth rate of less than 1.0 percent in the Eurozone, and a slowdown in China below the official 7.5 percent target.
This divergence is likely to result in continued strength in the U.S. dollar, which tends to exert downward pressure on commodity prices and make U.S. exports more expensive.
On the other hand, these central bank moves would strengthen the Fed's hand in its desire to raise interest rates if they result in accelerating economic activity overseas. The U.S. economy has been getting little help from the sluggish global economy, and yet the Fed has appeared intent on furthering the process of normalization, albeit slowly. If overseas activity improves, and lends even marginal support to the U.S., it makes the Fed's path forward easier to execute.
And the downward pressure on commodity prices from a stronger dollar is beneficial to consumers and many industries alike. According to AAA, the national average for a gallon of regular unleaded gasoline fell again last week, to $2.82. In June, the national average was $3.70.
Some of the magnetic pull of higher interest rates in the U.S., and the corresponding upward pressure on the dollar, could be offset by a shift in investor sentiment toward markets where monetary stimulus is an increasingly stronger tailwind.
Eurozone equities, for example, trade at a valuation discount to the U.S., and if the belief continues to build that the ECB is ultimately headed toward a full-blown program of quantitative easing, flows could be increasingly redirected their way. If they are, interest rates in the U.S. could also drift higher.
Central bank moves alone will not solve the structural problems facing the Eurozone, China, nor Japan. But they obviously can be a powerful short-term stimulus to financial assets, as we have seen repeatedly throughout the recovery from the financial crisis. As year-end asset allocation decisions are being formulated, this renewed monetary activism will become an increasingly important consideration.
This week it is OPEC's turn to weigh in on the global stage as it meets in Vienna on Thursday to consider production quotas against a backdrop of tumbling oil prices. While certain individual members are calling for cuts of up to one million barrels per day, most investors believe that is unlikely. As swing producer, Saudi Arabia is the key player, and it seems comfortable with prices where they are. They are low enough to squeeze certain high cost producers, yet high enough to still be profitable for the Saudis to continue pumping.
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.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
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.
© 2014 Ameriprise Financial, Inc. All rights reserved.
11/24/2014 | David Joy
Three weeks ago it was the Bank of Japan that jolted the global markets with its surprise announcement of a sharp expansion of monetary stimulus. Last week, on Friday, it was the People's Bank of China's and the European Central Bank's turn, as the former unexpectedly lowered interest rates and the latter reiterated its commitment to supporting growth and raising inflation in the Eurozone.
Market reaction was pronounced. Stocks worldwide rose sharply, the dollar surged, while commodity prices rose despite the dollar's strength. The Euro Stoxx 50 index rose 3.0 on Friday, followed by a more modest gain of 0.5 percent in the S&P 500. The MSCI Emerging Markets index climbed 1.1 percent. Stocks in China rallied sharply in Monday trading. The euro gapped lower against the U.S. dollar, oil and industrial metals prices rose, and bond yields moved lower.
These central bank moves contrast sharply with the posture of the Federal Reserve, which is headed in the opposite direction and beginning the process of slowly normalizing policy. The U.S. economy is growing at a current pace of roughly 3.0 percent, and stands in stark contrast to the recession in Japan, a growth rate of less than 1.0 percent in the Eurozone, and a slowdown in China below the official 7.5 percent target.
This divergence is likely to result in continued strength in the U.S. dollar, which tends to exert downward pressure on commodity prices and make U.S. exports more expensive.
On the other hand, these central bank moves would strengthen the Fed's hand in its desire to raise interest rates if they result in accelerating economic activity overseas. The U.S. economy has been getting little help from the sluggish global economy, and yet the Fed has appeared intent on furthering the process of normalization, albeit slowly. If overseas activity improves, and lends even marginal support to the U.S., it makes the Fed's path forward easier to execute.
And the downward pressure on commodity prices from a stronger dollar is beneficial to consumers and many industries alike. According to AAA, the national average for a gallon of regular unleaded gasoline fell again last week, to $2.82. In June, the national average was $3.70.
Some of the magnetic pull of higher interest rates in the U.S., and the corresponding upward pressure on the dollar, could be offset by a shift in investor sentiment toward markets where monetary stimulus is an increasingly stronger tailwind.
Eurozone equities, for example, trade at a valuation discount to the U.S., and if the belief continues to build that the ECB is ultimately headed toward a full-blown program of quantitative easing, flows could be increasingly redirected their way. If they are, interest rates in the U.S. could also drift higher.
Central bank moves alone will not solve the structural problems facing the Eurozone, China, nor Japan. But they obviously can be a powerful short-term stimulus to financial assets, as we have seen repeatedly throughout the recovery from the financial crisis. As year-end asset allocation decisions are being formulated, this renewed monetary activism will become an increasingly important consideration.
This week it is OPEC's turn to weigh in on the global stage as it meets in Vienna on Thursday to consider production quotas against a backdrop of tumbling oil prices. While certain individual members are calling for cuts of up to one million barrels per day, most investors believe that is unlikely. As swing producer, Saudi Arabia is the key player, and it seems comfortable with prices where they are. They are low enough to squeeze certain high cost producers, yet high enough to still be profitable for the Saudis to continue pumping.
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.
The EURO STOXX 50 is a market capitalization-weighted stock index of 50 large, blue-chip European companies operating within eurozone nations. The universe for selection is found within the 18 Dow Jones EURO STOXX Supersector indexes, from which members are ranked by size and placed on a selection list.
The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
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.
© 2014 Ameriprise Financial, Inc. All rights reserved.
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