Shares rose and currencies wobbled as the European Central Bank followed the US Fed and the Bank of Japan in heading down the quantitative easing route.
As a result our market will start with another nice little gain this morning of around 50 points, judging by trading on the futures market.
The Aussie dollar regained the 81 US cent mark in early trading, but then fell late in the session to around 80.13 and looking weak.
It could drop under 80 US cents during trading today, judging by the extent of the fall this morning in the wake of the ECB’s decision.
Markets in Europe rose by between 1% to 2.45%, US markets rose, oil eased, and gold was $US7 an ounce higher in New York trading and edged back over the $US1,300 level (And $US11 an ounce higher at $US1,305 in after hours trading).
Sharemarkets in Europe hit another round of seven year highs (There have been quite a few seven year highs in recent weeks as the ECB’s key decision approached).
US markets took time to assess the ECB’s move, but staged a late rally to close up well over 1.40% for the Dow and the S&P 500.
US oil prices fell more than 1%, reversing an early rise, after official figures showed US oil stocks were at their highest for 80 years for late January – which is when they generally are being run down because of high winter demand.
The solid night for equities will overshadow yet another sharp fall in iron ore prices to a near record low of $US66.77 a tonne overnight.
The ECB said it would buy Eurozone government bonds from this March until the end of September 2016, despite opposition from Germany’s central bank (the Bundesbank).
Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing program will pump 60 billion euros ($US68.8 billion) a month into the economy, ECB President Mario Draghi said.
By September next year, more than 1 trillion euros ($1.14 trillion) will have been created and spent trying to force inflation higher and stimulate demand in the moribund eurozone economies.
"The combined monthly purchases of public and private sector securities will amount to 60 billion euros," Draghi told a news conference. "They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation."
He said bonds will be bought in the market in proportion to the ECB’s capital key, meaning the largest economies like Germany and France will see more of their debt purchased by the ECB than smaller nations like Greece and Austria.
The Greek government, which faces national elections on Sunday, said that if the review of the country’s bailout stalls or is abandoned (as the Opposition parties say they will do) Greek bonds will be excluded from the ECB’s buying.
Ahead of last month’s move the prospect of the ECB’s move had already prompted the Swiss central bank to unpeg the franc from the euro, while Denmark, whose currency is pegged to the euro, was forced to cut interest rates a second time in three days in anticipation of the flood of money.
Denmark sliced its key interest rate to negative 0.35%, from negative 0.20%, meaning you will have to pay at least 35 cents in every $100 deposited in Denmark.
The negative rates are aimed at defending the pegging of the krone to the euro. The move is aimed at turning back an expected flood of money from the ECB’s easing by forcing investors to pay to hold their money in Danish krone.
The euro fell to eleven year lows around 1.1390 against the US dollar in the wake of ECB’s move. The euro is close to all time lows against the Aussie dollar as well.
Eurozone inflation was falling slowly before the plunge in oil prices from late November pushed it into negative territory, raising fears that the eurozone could follow Japan in lurching into a deflationary rut.
The slide in oil prices has seen central banks rushing to cut rates in the past six weeks – Norway, India, Turkey and Canada have cut the cost of borrowing while two British members of the Bank of England’s policy making committee have stopped agitating for a rate rise and now support no change as UK inflation falls to around 1% or less, by some measures.
The ECB has already cut interest rates to record lows. Overnight it again left its main refinancing rate, which determines the cost of euro zone credit, at 0.05%.
Cutting that rate to record lows, and then introducing schemes to pump money directly to bankers to onlend to customers were designed to kick start the eurozone economies, which with the exception of Germany and Spain, have refused to budge.
Now that weak demand has been slowly dragging inflation levels lower (indeed Italy, Spain, Greece, The Netherlands, Australia and Finland have already started experiencing severe disinflation, or outright deflation).
That is a further drag on the economy, as consumers and business hold back purchases, waiting for more price falls. But the price of debt doesn’t fall, it rises in real terms, slowly crushing consumers and businesses, whose income and profits are falling are the growing deflationary pressures.
They key is to try and change inflationary expectations of consumers and business – it’s a very difficult task.
The US Fed’s three bouts of quantitative easing finally forced the US economy into a more sustained growth phase last year, but it took the best part of seven years of record low interest rates, saving banks and then the three bouts of QE.
But economists point out that US inflationary expectations are now lower than when the Fed started the QE (the lower oil prices have helped), but inflationary expectations were weakening before the plunge in oil prices from November onwards.
And the Bank of Japan’s huge bout of easing, currently happening, has failed dismally to change Japan’s inflation – it boosted inflation initially out of the deflationary rut and had a target of 2% inflation by April of this year.
That has now been pushed back into 2016 at the earliest, and probably 2017, or will never be met. And economists fear the slide in oil prices will drag Japan back into deflation in the next couple of months.
Economic growth in Japan remains fitfull and unconvincing, but the move has weaken the yen, giving an initial boost to exports which hasn’t been sustained, as forecast. The stockmarket has revived as investors have used the free money to speculate, but the economy remains weak, as do wages and consumer demand.
