After initial disappointment, European equity and bond markets today reacted enthusiastically to the decision by the European Central Bank to cut three benchmark interest rates and expand its asset-purchase program. In particular, the inclusion of corporate bonds in the program for the first time cheered markets, which rebounded Friday to make up for much of Thursday’s post-announcement losses. The shadow that still looms over European markets is not how long this rally in risk assets can last, but how much more can be accomplished in the underlying economy through monetary policy alone. Negative rates, pushing banks to lend and buying financial assets can only accomplish so much without organic demand drivers. To date, these catalysts have been in short supply as global demand has weakened, particularly in the developing world. ECB President Mario Draghi effectively said as much at the end of his press conference yesterday when he managed expectations for no more actions in the near future. For the European Union, the challenge now will be structural reforms that will require political cooperation, something that may be in short supply if the ongoing refugee and Brexit debates are any indications.
IEA says worst may be over for oil prices. On Friday, the International Energy Agency released its monthly report, which included an estimate that output from non-Organization of Petroleum Exporting Countries economies will decline by 12 percent in 2016 as more production capacity is curtailed in the Americas. The agency estimates that U.S. production will decline by a full 530,000 barrels per day. Combined with forecasts for possible supply disruptions within OPEC and less impact from Iran’s reemergence as an exporter than initially estimated, the report concludes that the global supply glut that drove crude prices to multiyear lows may have peaked.
New Loans Extended by Chinese Banks Decrease. Data on loans released by the People’s Bank of China on Friday revealed that the value of new local currency-denominated loans in February fell by 1.3 trillion yuan ($200 billion). The move follows a sudden, sharp spike in lending in January that some analysts ascribed in part to the timing of the Lunar New Year holiday this year. Separately, Reuters on Thursday reported that the PBOC is considering issuing new rules that will allow commercial lenders to convert nonperforming loans (NPLs) to equity stakes. The move to allow banks to proactively grapple with NPLs comes as industry analysts have raised concerns that bad debts have been underreported by Chinese commercial lenders.
U.K. trade gap with EU hits record. Figures for January trade with the rest of the European Union released on Friday by Britain’s Office of National Statistics indicated the highest monetary deficit since the data was first compiled in 1998. The $8.1 billion pound sterling ($11.6 billion) gap was largely attributable to weak exports to the rest of the EU. The EU is the U.K.’s biggest trading partner, accounting for more than half of all shipments abroad.
Libor traders sentenced. Two British traders were sentenced in the Southern District of New York on Thursday after being convicted of manipulating the London inter bank offered rate (Libor). The former Rabobank executives, Anthony Allen and Anthony Conti, were convicted in November. Allen received two years in prison, the longer of the two sentences. Both men will remain free pending appeal and both continue to deny wrongdoing in a case that has garnered a measure of sympathy among industry insiders who feel that a number of traders caught up in ongoing manipulation investigations did not carry the same burden of guilt as others. U.S. prosecutors had hoped to secure a stiff sentence against the two men in keeping with the 11-year sentence handed down by a U.K. court against former UBS and Citigroup trader Tom Hayes.
GOP debate more civil than past clashes. The tone was more subdued at a debate between remaining Republican presidential hopefuls in Miami Thursday night. Real estate mogul and GOP frontrunner Donald Trump was relatively quiet throughout the evening, avoiding the confrontations that have been a hallmark of his debate appearances. Many view the upcoming Republican primaries in Florida and Ohio on March 15 as critical tests for the other candidates to slow Trump’s march to the party’s nomination.
Portfolio Perspective: The Long View of the Bull Market’s Birthday
As the celebration began yesterday over the seventh anniversary of this bull market, I reminded myself that we have the habit of looking at the major averages in nominal dollar terms. Yet, when one adjusts the market action for whatever inflation we have had, the bigger story is that even with the post-recession run, in inflation-adjusted returns, the market is really no higher today than it was in 1999.
In real terms, 17 years of basically nothing except for a couple of agonizing bear markets and a few very whippy bull markets. And in gold terms, guess what? We never really did have much of a bull market at all, and this includes the past several years (until recently) when gold sold off from the peaks following the ascent of Mario Draghi to the helm of the European Central Bank and the widespread investor belief that he had a warehouse of policy bazookas at his disposal.
A bull would say that this means the bull run has further to run since in real or gold terms, there has not really been much of a rally at all off the lows. Then again, the bears would point to the fallacy of TINA (there is no alternative...to stocks, that is) for much of this. There clearly are since equities are just one part of the capital structure, when you think about it...there are corporate bonds to consider as well (that generate a decent yield and at a safer part of the capital structure).
David Rosenberg is chief economist and strategist for Gluskin Sheff + Associates in Toronto
