This January has been an incredibly important month in the realm of central banks and oil…and we’re not through yet.
It all started last week when the Swiss National Bank (SNB) decided it could no longer maintain the cap it had put in place on the Swiss franc compared to the euro. Back in 2011, when investors were flocking to the relative safe-havens of gold, U.S. Treasuries and the franc, the value of each of these assets began to skyrocket.
When the value of the franc reached parity with the euro, the SNB decided it needed to take action to protect the export-based Swiss economy and initiated a price cap of 1.2 franc per euro. The SNB held this cap for nearly three-and-a-half years before abruptly abandoning it last week in the face of a weaker euro that was potentially going to be made even weaker by the much-anticipated quantitative easing (QE) program from the European Central Bank (ECB). We’ll talk more about this later.
The SNB’s abandonment of its currency cap sent shock waves through the market, leading to liquidity issues and speculation of more volatility to come. However, the U.S. stock market held firm at support, as Wall Street was still looking forward to the ECB’s monetary policy statement and hoping that the ECB would announce a huge new monetary stimulus program.
Now, this week carried three important news announcements.
First, the Bank of Canada (BOC) announced a surprise rate cut — cutting interest rates in Canada from 1% to 0.75%. It did so as “insurance” against the potential negative impacts falling oil prices could have on the Canadian economy. You see, Canada is a net exporter of oil, and falling oil prices could put a significant dent in the country’s gross domestic product (GDP).
Next, the Bank of Japan (BOJ) announced that it was cutting its inflation forecast — blaming falling oil prices for the drag on overall price increases — and leaving its QE program in place at an annual rate of 80 trillion yen ($674 billion). Some had hoped the BOJ would increase its stimulus spending, but the market appears to be content that the bank at least held its spending constant.
Lastly, and perhaps most importantly, the Wall Street Journal broke the story that the ECB was looking at introducing a QE program that would spend 50 billion euros per month (or $696 per year) buying sovereign debt from members of the eurozone. It appears the ECB is worried enough about deflation — which falling oil prices have contributed to — that it is willing to take the QE leap it has been hinting at for months.
Since the ECB actually did announce this program at its monetary policy meeting yesterday, it will be a huge boon for the markets. The ECB will be matching the spending of the BOJ, and all of that new money coming into the financial markets will most likely boost demand for higher-yielding assets like stocks.
This will carry us forward into next week when the Federal Open Market Committee (FOMC) is scheduled to release its next monetary policy statement on Wednesday, Jan. 28. So far, the FOMC has been willing to signal that it will be “patient” and keep interest rates low as long as economic conditions warrant.
While the steps that central banks have taken, and those that they may take in the future, appear to be providing an easy-monetary environment — which is good for stock prices — we still don’t know if they will be stimulative for the global economy in general.
Until we see economic growth start to accelerate and the fear of deflation ameliorate, stock prices could rise while oil prices remain low.
Low oil prices will continue to weigh on oil-exporting economies — like Canada, Russia and many OPEC nations — and these countries could continue to be a drag on the global economy.
In other words, we’ve got a ways to go before we’re out of the woods as a global economy, but stock prices are poised to continue their bullish ascent in the meantime.
InvestorPlace advisors John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of SlingShot Trader, a trading service designed to help you make options profits by trading the news. Get in on the next trade and get 1 free month today by clicking here.
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