European Central Bank in surprise move

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European Central Bank

All eyes were on the European Central Bank (ECB) last week. On Thursday ECB President Mario Draghi announced a long-anticipated expansion of the bond-buying programme (quantitative easing), and one that in fact exceeded expectations.

This means that the total value of the programme will be in excess of €1.1 trillion (where €1 trillion had been expected). Jacqueline van der Neut Jacqueline van der Neut Investment Funds Specialist

President Draghi also announced that he intends to continue the programme until inflation in the eurozone reaches levels below, but close to, a targeted inflation rate of 2%.

The ECB hopes that these measures will boost economic growth in the eurozone and allow inflation to increase. In our view, this programme will indeed lead to economic growth and to higher inflation and as such we agree that this move by the ECB is a judicious one. Falling short of its inflation target, the central bank is obliged to take action to help achieve that target. Nor are many alternatives available to the ECB for manipulating inflation. At the same time, though, we believe that the programme should not be expected to work miracles. Low economic demand is a major problem in the eurozone, and cheap money may help resolve this. However, the eurozone is struggling with a greater problem at the underlying level, one which quantitative easing cannot solve: a downward trend in its economic growth. Reversing this trend will require structural reforms in the various countries of the eurozone. The ball is now in the politicians’ court.¬†¬†

Response from the financial markets

The news from the ECB received a warm reception on the financial markets. Stock indexes rose all around the world. The AEX closed 1.5% higher than on Wednesday. The ECB’s decision caused a positive sentiment on the markets in the US and the Far East. The euro plummeted even before the press conference was over, and by the end of the day was down by more than 1.5%. Interest rates in southern eurozone countries fell slightly. Bond yields in the Netherlands and Germany dropped a little, by a few basis points. The price of gold also increased. With euros losing value, investors tend to look for safe harbours, and gold is still generally considered to offer stable value. The gold price is already up by more than 9% since the beginning of the year. This upsurge might only be temporary, though: if and when interest rates rise in the US, gold will likely become a less attractive investment, with higher interest rates making dollars more lucrative and gold becoming relatively more expensive. Economic recovery in the US will also cause the sentiment among investors to improve, rendering them less likely to be interested in safe harbours such as gold.

The week’s other developments

t is easy to overlook the other developments that occurred last week. On Monday the Chinese markets plummeted, losing some 8%. The cause lay in the Chinese government’s measures to curb private investments. Last year saw the Chinese markets soar – Shanghai’s leading index, for example, rose almost 58% in 2014 (in local currency). This surge was fuelled largely by private investors. In an effort to curb speculation, the authorities have now taken measures rendering it more difficult to invest using borrowed money.

The death of King Abdullah of Saudi Arabia on Friday morning caused a slight upturn in oil prices of around 1.5%, to US$49.32. It is possible that investors are speculating that Saudi Arabia, the largest oil producer in oil cartel OPEC, might adopt a new line of policy. As the price of Brent rose, WTI oil (from the US) also climbed to US$46.75 per barrel. They remain at their lowest levels since early 2009, however.
Various companies including Unilever and ASML presented their quarterly results last week. Unilever’s increase in turnover over Q4 of 2014 fell short of expectations. The earnings for 2014 as a whole showed a slight improvement, though. All things considered, the company’s results were disappointing. Following the announcement of its results Unilever lost around 2%, though it recovered later the same day. With interest rates low and no indication of any upturn in the foreseeable future, Unilever’s attractive dividend yield is enabling the company to benefit from the ‘search for returns’. ASML had a strong quarter, with turnover exceeding the analysts’ forecasts. The company’s operating income was as much as 37% higher than the consensus. ASML rose slightly upon announcement of this good news.

A potential surprise in Greece

The earnings season is in full swing, and various corporate results will be announced this week. In the Netherlands, Philips, Unibail-Rodamco, Royal Dutch Shell and other companies will present their data for Q4 of 2014. In macroeconomic news, the Leading Indicator  in the United States (US) is will be published this afternoon , which measures economic activity and is regarded as a gauge of economic stability in the US. Data about consumer confidence in the US will also be released this week, and a meeting of the Federal Reserve is scheduled. Germany will publish unemployment data, which serves as an important indicator of economic activity.

Of course Greece’s parliamentary elections on Sunday should not be overlooked. These elections are exciting: the outcome may affect the euro and the repayment of Greece’s deficit. The predominant theme during the elections was the severe austerity measures imposed on the Greeks in recent years. Syriza leader Alexis Tsipras led the polls for a long time, promising to end what he terms the ‘humanitarian crisis’ in his country. Greece is currently paying billions of euros in interest and repayments. Syriza argues that this money should instead be used to fight poverty. In the previous elections Syriza threatened a Greek exit from the eurozone. At present, the party have toned down these threats somewhat and mostly advocate a new deal that they hope will offer the Greeks some breathing space. We believe that Syriza’s radical left-wing politics will not be as bad as feared: if it wishes to run a government the party will need to work together with coalition partners and so compromise some of its policies.

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