March 5, 2012
Euro money printing continues to boost markets
North American equities markets continued to perform well in recent weeks, helped by a variety of factors ranging from strengthening economic data to flexible global central bank monetary policies. The biggest recent driver was the European Central Bank which launched a EUR 529 billion liquidity operation last month that went a long way towards calming market fears that the Greek sovereign debt crisis could spill over into other larger economies.
The ECB action included a series of loans to 60 or so banks, which minimize chances that those with large sovereign debt exposure, may be subject to large withdrawals by worried customers. Financial sector lenders have been among the biggest losers in Greek debt restructuring initiatives. This has led to rising premiums on inter-bank loans and worries that the system could freeze up. The new loans, when combined with a similar ECB move in December, put more than EUR 1 trillion into the system, going a long way to easing those concerns.
Repercussions from the move, which was similar in some respects to the US Federal Reserve’s earlier Quantitative Easing initiatives, reverberated quickly in equity and fixed income markets across the globe. While much of the money forwarded to the banks is unlikely to find its way into corporate or individual investment projects, banks are using the cheap financing to buy sovereign debt, which pays a much higher, and relatively risk free rate of return. This is unlikely to have much of an effect on Greece, which markets continue to believe will engage in a quasi debt default. However it will go along way in preventing the crisis to spread to countries such as Spain and Italy.
The new money in the system also went a long way towards keeping downward pressure on bond rates, in a wide range of maturities in many countries. Stock prices, which are in many ways closely linked to bond prices (investors look at bond yields to guesstimate how much a share of stock should yield, and the price earnings ratio that it should trade at), thus continued the upwards momentum they have shown since the start of the year. The S&P/TSX, the S&P 500 and the Dow Jones Industrial Average, and the major European and Japanese indexes have all done well.
Whether this will last is hard to say. Generally after the kinds of price swings we have seen recently, stocks often either slow their rates of growth or they take a bit of a breather. Furthermore, considerable financial uncertainties persist, including continued belt tightening in the US among state and local governments and a strong Canadian dollar, which hurts our export posture. On the other hand, US domestic demand has been surprisingly strong, which has acted as somewhat of a counterbalance.
In short, for now things seem to be going in the right direction.
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Peter Diekmeyer Communications Inc.