ECB makes major move
By Laif Meidell, CMT, president of American Wealth Management, and portfolio manager of the AdvisorShares Meidell Tactical Advantage ETF (MATH)
… And there was much rejoicing in the land. It’s official: The European Central Bank will purchase €60 billion in assets per month, including government bonds, debt securities and private-sector bonds, starting in March. The stimulus program is set to run for roughly 18 months for a total commitment by the ECB of more than €1 trillion ($1.14 trillion). ECB President Mario Draghi signaled the purchases could last longer if the ECB isn’t meeting its inflation target of just below 2 percent. The stock market sold off for the first 15 minutes of the trading day Thursday morning, but then investors changed their mind and decided it was a good thing, with the Standard & Poor’s 500 ending the day 1.53 percent higher.
Economic intervention on the part of central banks, such as adjusting short-term lending rates, is referred to as monetary policy. As of Thursday, the ECB has ushered in a new era of monetary policy for the eurozone, which will ripple through the world trading floors, corporate boardrooms and European capitals. However, too often over the past decade political leaders have looked to central banks, and the International Monetary Fund, to solve their economic and financial problems, due to a lack of resolve to make changes to fiscal policy that would improve economic growth.
President Draghi reminded European leaders on Thursday that the ECB’s efforts will not be enough to fix the economy. In his statement he said, “What monetary policy can do is create the basis for growth. But for growth to pick up, you need investment. For investment, you need confidence, and for confidence you need structural reform.” In other words, what the ECB has done is bought European governments time to make structural changes to their taxation and spending programs that will enhance economic growth over the longer term.
As the euro declined on Thursday, the effects were being felt elsewhere, as Denmark cut its interest rate for the second time in a week, hoping to discourage investors from buying its currency and driving its value higher. Here in the U.S., investors seem to be getting more comfortable with lower-quality bonds again. This week, the top-performing the bods were convertible, with the Barclay’s U.S. Convertible bond index gaining 1.25 percent over the past five trading days, followed by the Barclays High Yield Very Liquid index, up 0.23 percent over the same period.
This commentary originally published in the Reno Gazette-Journal. Performance numbers used in this article were obtained through eSignal and are not guaranteed to be accurate.