Tag Archives: economy

ECB Quantitative Easing and Inflation of US stock prices

Following the recent actions of the US Federal Reserve and the Central banks of England and Japan, the European Central Bank (ECB) is embarking on its own quantitative easing (QE) path. Starting in March the ECB will purchase 60 billion euro securities per month and continue these purchases until September 2016; for a total of 1.14 trillion euros.

This recent announcement by the ECB  resulted in an immediate 20% fall in the Euro exchange rate compared to the US dollar and a fall in yields on 10-year German Bunds to just 0.36%, French bonds to 0.54%, Spanish bonds to 1.37%, and Italian bonds to 1.52%. Compare this to the 10-year US treasury which is currently at 1.79%.

Under a “normal” economic cycle,  QE currency depreciation is expected to increase your exports and make your imports  more expensive. QE depreciation is also expected to benefit domestic companies with increased export sales,  job creation, and lower unemployment. Implicit in QE currency depreciation is the notion that  your currency’s best use is for purchases at home. European investors on the other hand may follow a different notion.  One more guided by maximum return on investment; where ever that may be.

Take home message

With the 10-year US Treasury  yield higher compared to European countries and a strong US  dollar, it is a “no brainer” that euros will pour into American markets and act as an accelerant to inflated US stock prices.

Cracks in Global Quantitative Easing: Japan

Cracks in Japan's financial systems

Japan’s fiscal policy shows signs of stress

Moody’s Investors Service downgraded Japan’s credit rating  today  from A1 to Aa3  with a stable outlook over a heightened uncertainty of whether Japan could:

1. Achieve its fiscal deficit reduction goals.

2. An uncertainty over the timing and effectiveness of growth enhancing policy measures in a deflationary environment.

3 The increased risk of rising Japanese government bond B yields and reduced debt affordability  in the medium term.

Moody’s downgrade comes after Prime Minister Shinzo Abe decided last month to delay  the 10% national sales tax that was scheduled to take effect in 2015. The reason for the delay was the calling of a snap election to ensure popular support for his economic policy.

Financial Impact and Effects

The Bank of Japan buys trillions of yen worth of Japanese bank bonds each month as part of their recent quantitative easing program. Moody’s rating downgrade will make it more difficult for the Bank of Japan to expand this bond buying program in the future and if the Aa3 rating is extended too long, it could have a negative effect on the Japanese economy and investment.