Friday, January 23, 2014 -
The stimulus bump in stock prices lasted one day, as stocks gave back some ground on Friday, following Thursday’s nice spike rally following the ECB announcement of over a trillion euro bond purchasing program to last just over a year.
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Thursday’s spike rally was expected and impressive following the ECB commitment to print over a trillion euros for bond purchases similar to what the Federal Reserve did following the 2008 financial crash. Friday’s rally . . . not so much!
Stocks moved mostly lower over the course of the trading day on Friday. Though prices had officially been positive over four straight sessions, it was only the Thursday spike rally that was significant and on Friday it disappeared as quickly as it showed up on Thursday. The major US indexes turned in a mixed performance with only the tech heavy Nasdaq showing much strength.
The tech-heavy Nasdaq managed to edge up 7 points (+0.2%) to 4,758, the Dow fell 141 points (-0.8%) to 17,673 and the S&P 500 slid 11 points (-0.6%) to 2,052. The NYSE finished at -0.65% and the small cap Russell 2000 at -0.12%.
With the strong spike rally on Thursday’s ECB QE announcement, the major indexes posted positive for the week. The The Nasdaq surged up by 2.7 percent, while the S&P 500 jumped by 1.6 percent and the Dow advanced by 0.9 percent.
Will Tempered ECB QE
Cool Stock Market?
It appears the tempered schedule of ECB QE, which will not begin for a couple of months, and the fact that nearly 80% of the stimulus will have country risk attached to the bond purchases may leave a negative taste in speculator’s mouths. Gamblers and speculators want to see QE with fully shared risk, but that is not going to happen in the Eurozone.
The weakness that showed up on Wall Street Friday may reflect sudden profit taking as investor’s enthusiasm about the European Central Bank’s new QE stimulus may quickly dampen. You see, this ECB QE may not create the wealth effect in easily inflated equities like we saw in the 2009 through 2014 Federal Reserve QE programs.
Regardless of whether ECB QE will be effective or not, ECB President Mario Draghi confirmed the Central Bank’s commitment to purchase 60 billion euros per month worth of securities, including investment grade sovereign bonds, beginning in March. The expanded asset purchase program is currently scheduled to last until September of 2016, although Draghi said purchases would continue until there is a sustained improvement in inflation.
It sounds a lot like Federal Reserve QE3, doesn’t it? Pump and pump until someone says it has worked enough to raise inflation levels – real economic genius here.
Questions about the effectiveness of the program are already sparking concerns, especially with regard to the significant lack of “shared risk” across the Eurozone, something Germany insisted on. Without Germany being on the hook for these new QE bailout bond buying programs, speculators may not be willing to bet each and every Eurozone country will be successful in managing their bailout risk.
Peter Boockvar, managing director at the Lindsey Group, noted that commodities did not participate in the rally on Thursday despite being the implicit target of ECB quantitative easing.
“Higher commodity prices, which will happen, will certainly solve Draghi’s ‘price stability’ problems,” Boockvar said. “Then we’ll definitely test the central bank thesis that higher inflation leads to growth rather than being a consequence of it.”
Being so late to the stimulus game, I question that ECB QE will be nearly as effective as the Fed QE in fluffing up stock prices. This is going to turn into a “Wait and watch” game over the next year. The US markets cannot benefit as nicely here. A falling euro and a rising dollar, all an outgrowth of ECB QE will put pressure on US products being sold into the global markets – they are going to be too expensive – and US companies will suffer proportionately. Maybe traders are already realizing this.
In overseas trading, most stock markets across the Asia-Pacific region moved notably higher during trading on Friday. Japan’s Nikkei 225 Index advanced by 1.1 percent, while Hong Kong’s Hang Seng Index shot up by 1.3 percent.
The major European markets also moved to the upside on the day. While the U.K.’s FTSE 100 Index rose by 0.5 percent, the French CAC 40 Index and the German DAX Index jumped by 1.9 percent and 2.1 percent, respectively.
Gold stocks came under considerable pressure on the day, dragging the NYSE Arca Gold Bugs Index down by 3.6 percent. The weakness in the sector came as gold for February delivery slid $8.10 to $1,292.60 an ounce.
In the bond market, treasuries moved notably higher, offsetting the weakness seen in the two previous sessions. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled 7.9 basis points to 1.817 percent.
Major Technical Topping Pattern
The last two months have clearly painted a topping pattern – all up to this latest ECB QE announcement this week. We have periodically analyzed the US markets in conjunction with the timing of Federal Reserve QE programs and at the end of every QE program, including the end of QE3/4 last fall.
This is readily apparent by even casually looking at the S&P 500 chart below:
Notice how strongly prices have tried to correct in the December through January time frame, falling four times and rising back on each correction attempt. The significance of the last two correction attempts is that the rebounds have been weaker and weaker, suggesting that the markets should be close to a strong technical rollover in early 2015.
A lot depends on how the ECB QE rollout gets treated. Will the banks selling bonds use the proceeds to buy up equities, like they have during the Federal Reserve QE? Will the ECB QE buy country bonds directly from governments, bypassing banks? Will the ECB QE act to put pressure on the US economy rather than fluff up the equity markets?
This ECB QE is not at all like the Federal Reserve QE programs. The markets US stock market may realize this sooner than you expect, and if so, make a strong correction in the February/March time frame.
The technical picture continues to scream for a strong intermediate correction!
While a slew of big-name companies are scheduled to release their quarterly results next week, the spotlight is likely to be on the Federal Reserve’s monetary policy announcement next Wednesday.
The Fed is widely expected to leave interest rates unchanged, although traders are likely to pay close attention to any changes to the accompanying statement.
Traders are also likely to keep an eye on reports on durable goods orders, new home sales, consumer confidence and fourth quarter GDP.
Week In Review
(briefing.com): Action Driven By Central Banks
Bond and equity markets were closed on Monday for Martin Luther King Day
The stock market kicked off the holiday-shortened week with a shaky Tuesday session. The S&P 500 settled higher by 0.2% after finding intraday support near its 100-day moving average (2007/2008). The tech-heavy Nasdaq outperformed, climbing 0.4%. Equity indices started the day with modest gains, but continued weakness in crude oil weighed on the overall risk tolerance and contributed to an early retreat. However, a handful of influential sectors were able to withstand the selling pressure, which in turn became a supportive factor during afternoon action. As for crude, the energy component retreated after The International Monetary Fund cut its 2015 global growth outlook to 3.0% from 3.5%, and continued sliding throughout the session. WTI crude ended lower by 4.1% at $46.51/bbl while the energy sector (+0.1%) settled near its flat line. Baker Hughes (BHI) beat estimates, but announced plans to reduce its workforce by 7,000 employees.
Equities enjoyed their third consecutive advance on Wednesday with the S&P 500 climbing 0.5%. The Wednesday session was filled with central bank-related storylines. The Bank of Japan got the ball rolling overnight by lowering its inflation outlook to 1.0% from 1.7%, which boosted the yen (117.80). The Bank of England was next on tap with the minutes from its latest policy meeting. The minutes were a bit surprising as Messrs. McCafferty and Weale, who previously voted in favor of rate hikes, rejoined the majority in their belief that hiking rates too early would prolong the period of low inflation. Global equities jumped off their lows in reaction to reports indicating the European Central Bank is set to propose EUR50 billion in asset purchases through 2016. The euro wobbled on the news before ending the day near 1.1590 against the dollar. In a surprising move, Germany’s 10-yr note tumbled, sending the benchmark yield higher by seven basis points to 0.47%. The Bank of Canada completed the central bank bonanza with a surprise 25-basis point cut to 0.75% in response to crashing oil prices, which are expected to put downward pressure on Canadian inflation. The loonie retreated to its lowest level since early 2009, sending USDCAD to 1.2330 from 1.2070.
The major averages registered their fourth consecutive advance on Thursday with the S&P 500 (+1.5%) reclaiming its 50-day moving average (2046/2047). The benchmark index erased its January loss while the Russell 2000 (+2.0%) displayed relative strength throughout the day. This week featured action from several major central banks and that extravaganza was topped off on Thursday when the European Central Bank announced the highly-anticipated launch of a quantitative easing program in the amount of EUR60 billion per month. In short, the program is aimed at stopping deflation that is due, in part, to low oil prices. However, the thought process behind the action is a bit questionable considering QE is expected to weigh on the euro, which will boost the dollar, thus putting pressure on dollar-denominated commodities like crude oil, which is at the root of eurozone’s deflationary tilt.
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