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.