On Thursday, the wait finally ended.
The European Central Bank has launched its eagerly awaited sovereign bond buying stimulus program, informally labeled “quantitative easing” or just QE by the financial cognoscenti. It’s been a long time coming, with ECB chief Mario Draghi — for political and legal reasons — after holding it out like a carrot-on-a-stick for the markets since the summer of 2012.
The size, composition, term and risk sharing were largely as expected. And while stocks initially moved to the downside, a drop in the euro bolstered currency carry trades and won the day.
In the end, the Dow Jones Industrial Average gained 1.5% as it largely erased its year-to-date losses, the S&P 500 gained 1.5%, the Nasdaq Composite gained 1.8%, and the Russell 2000 gained 2.1%.
Financial stocks led the way, gaining 2.5% as a group thanks to a 4.4% bounce in Bank of America Corp (NYSE:BAC) thanks to strong earnings from a number of regional players. Retail stocks were in the mix too, rising 2.6%.
BlackBerry Ltd (NASDAQ:BBRY) gained 5.8% on ongoing rumors it is being sniffed out by Samsung. Southwest Airlines Co (NYSE:LUV) surged 8.4% thanks to a fourth-quarter earnings beat and positive guidance. Overall, however, with 15% of S&P 500 companies reporting, the Q4 earnings season remains soft with a 0.5% EPS growth rate (vs. 1.7% in Q3) and a 0.2% average beat to estimates (vs. a five-year average of 5.5%).
Crude oil was smashed lower as the dollar strengthened; pushing prices down 2.3% to $46.69 a barrel. The euro’s slide encouraged gold buyers, however, with the yellow metal adding 0.8%. Treasury bonds were mixed and largely unchanged.
Back to Europe.
The ECB’s QE program will be worth 60 billion euros in monthly purchases through September 2016 or possibly longer starting in March. Purchases will include government bonds, supra-national (such as European Investment Bank), asset-backed securities, and covered bonds. (The last two are part of a previously announced bond buying program.)
As for risk sharing, 92% of the purchases will be done at the level of the national central banks, minimizing the sharing of default risk across the eurozone (to placate German concerns).
In the short-term, the move validates years of promises and should continue to boost risky assets and crush the euro. At least, for one more day.
But then, Sunday’s Greek election results loom with the anti-austerity/anti-bailout Syriza party in the lead. We also have next week’s Federal Reserve policy decision which should continue to emphasize the approach of the first rate hike since 2006 sometime this summer.
As for the long-term success of the ECB’s move, analysts aren’t convinced.
According to the economists at Societe Generale, because of these problems, the Euro QE program needs to be triple the announced size to work; something on the order of 3 trillion euros to return inflation to the 2% target.
Why? Because in the estimation of SocGen’s Michel Martinez, Euro QE “could be five times less efficient than in the U.S.” The team at Capital Economics warns that while the ECB’s announcement didn’t disappoint, the mixed global record of quantitative easing suggests it “won’t miraculously cure all of the currency union’s problems.”
So look for the eurozone structural problems to reappear soon — possibly as soon as Sunday.
In response, I continue to recommend clients hold out largely in cash with a few targeted bets on precious metals. These include the Feb $11 calls on Barrick Gold Corporation (USA) (ABX), which are up nearly 270% for Edge Pro clients since recommended on Jan. 13.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
