ecb - What We're Reading - StockBuz2024-03-29T02:18:39Zhttp://stockbuz.ning.com/articles/feed/tag/ecbMonetary Policy And Rates. You Must Understand Money Flowhttp://stockbuz.ning.com/articles/monetary-policy-and-rates-you-must-understand-money-flow2015-09-13T20:35:14.000Z2015-09-13T20:35:14.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><span style="color: #ccffff;">Over the years, it's become essential (to me) to understand monetary policy and money flows across the globe. With all of the recent 'pining' over whether the Fed will begin to raise rates this year, I felt this piece from Financial Times gave a great representation of who is worried over what, and why. I truly recommend you give if it a read. There's also more discussed on <a href="http://www.ft.com/intl/cms/s/0/551c448e-5868-11e5-a28b-50226830d644.html#axzz3lcleNAsE" target="_blank">this article</a>. Enjoy.</span></p>
<h3 id="faq-why-now" class="card__title" itemprop="name">Why is the Fed considering raising interest rates now?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>America has seen its longest private sector hiring spurt on record, and unemployment has halved since its peak. The Fed thinks the hot jobs market could spur a pickup in inflation and wages. Given it is tasked with keeping inflation low, it is considering raising the cost of borrowing to keep the economy on an even keel.</p>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291222?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291222?profile=RESIZE_1024x1024" width="700"></a></p>
</div>
</div>
<h3 id="faq-why-so-long" class="card__title" itemprop="name">Why have rates in the US been held so low for so long?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>The US was hit by the crash in its housing market and banking sector between 2007-09. The Fed felt it needed to pull out all of the stops to prevent the economy from collapsing into a new Great Depression. One way of keeping things afloat was by cutting the cost of borrowing to rock-bottom levels.</p>
<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291248?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291248?profile=RESIZE_1024x1024" width="700"></a>
</div>
</div>
<h3 id="faq-is-the-economy-ready" class="card__title" itemprop="name">Is the US economy ready to cope with interest rate rises?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>That is the trillion dollar question - and opinions vary widely. To optimists, the Fed has managed to engineer a respectable recovery that is outshining many other economies. They say a quarter-point increase would have a negligible impact but is a sensible first step to ensure the Fed stays ahead of inflation. Sceptics warn that inflation remains on the floor and the Fed risks roiling world markets and pushing up the dollar if it acts too soon.</p>
</div>
</div>
<h3 id="faq-how-quickly" class="card__title" itemprop="name">How fast are rates likely to rise?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Not fast at all - if the Fed is to be believed. One of the mantras adopted by Chair Janet Yellen this year has been that rate rises will be gradual. The pace of increases - when they begin - is expected to be less than half the tempo of the Fed’s last round of rate rises, which started in 2004. And the ultimate rate they stop at is likely to be very low too, at not much more than 3 per cent.</p>
<h4 class="chart-title">Federal reserve interest rate predictions from June 2015 meeting</h4>
<a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291265?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291265?profile=original" width="340"></a>
</div>
<hr class="card__splitter">
</div>
<h3 id="faq-how-high" class="card__title" itemprop="name">Will they return to the levels seen pre-crisis?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Not for the foreseeable future, according to Fed policymakers’ own projections. The Fed believes the rate compatible with stable growth and prices has sunk sharply because of the lingering effects of the crisis and will increase only gradually. In this subdued post-crisis world, the central bank will need to keep its foot on the accelerator for some time to come.</p>
</div>
</div>
<h3 id="faq-how-economies-are-affected" class="card__title" itemprop="name">How does a rise in central bank interest rates get transmitted to the wider economy?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Adjusting the federal funds rate - the rate banks charge each other for short-term loans - affects other short term rates paid by firms and households. These movements also have knock-on effects on long-term rates, including mortgages and corporate bonds. Changes in long-term rates will have an influence on asset prices, including the equity market. During the crisis the Fed also purchased longer-term mortgage backed securities and Treasury bonds to lower the level of long-term rates.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">US Business</span></h3>
<p></p>
<h3 id="faq-are-businesses-ready" class="card__title" itemprop="name">Are businesses ready for an increase in borrowing costs?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Many corporations have taken advantage of the low rate environment to borrow money via the bond markets. Most companies say they are relaxed about the impact of a small rate hike, believing the market has already priced their bonds or such an event. However, some economists say the interest payments for companies who have issued low-grade debt could rise more quickly.</p>
</div>
</div>
<h3 id="faq-what-are-zombie-companies" class="card__title" itemprop="name">What are zombie companies and why are we concerned about them?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Zombie companies are enterprises that have been able to stay in business primarily because of the persistence of ultra-low interest rates, and which would be unable to survive a rate hike. Many of these companies will go under when their borrowing costs rise, but some, such as “bond king” Bill Gross, think this could be a good thing. They argue that when weak companies file for bankruptcy, their owners and employees often go on to work for more successful ventures, which is ultimately a good thing for the economy.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">US Consumers</span></h3>
<p></p>
<h3 id="faq-personal-finances" class="card__title" itemprop="name">What will a rate rise mean for my personal finances?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>An upward move in short-term interest rates will be positive for savers who have been missing out on interest on their deposits. But the change could also be transmitted to a range of other interest rates, including car loans, credit cards and mortgages, which would make them more costly.</p>
</div>
</div>
<h3 id="faq-are-consumers-ready" class="card__title" itemprop="name">Are US consumers in general prepared for rates to rise?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>The burden of household debt has fallen since the crisis, reaching 114 per cent of net disposable income last year, according to OECD statistics, suggesting consumers are better prepared for higher borrowing costs. In addition, a quarter-point hike would still leave rates at historically low levels.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">Financial Markets</span></h3>
<p></p>
<h3 id="faq-how-will-investors-react" class="card__title" itemprop="name">How will investors react to higher US interest rates?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>This is the hottest and most disputed question in markets today. Some say the Fed has telegraphed a move so clearly that markets will take any interest rate increase in their stride. Others fret that some turbulence is inevitable after seven years of “ZIRP” - zero interest rate policy - and trillions of dollars worth of bond-buying by the US central bank.</p>
</div>
</div>
<h3 id="faq-currency-markets" class="card__title" itemprop="name">How are currency traders positioning themselves in the anticipation of rate rises?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Currency markets are fickle, but differences in interest rates tend to drive movements in the longer-run. For example, if a European investor can borrow cheaply in Berlin and buy a higher-yielding US bond, then all else being equal the dollar will rise versus the euro. As a result, the dollar started the year in rip-roaring fashion, with an index measuring the US currency against a basket of its peers rocketing to a 12-year high, as investors bet on the Fed tightening monetary policy and bond yield differences widened.</p>
<p>Since then it has continued to beat up emerging market currencies but the broad rally has fizzled out as the euro and the Japanese yen have regained their footing. However, many analysts and fund managers expect the greenback to continue to climb higher in the coming years, as the Fed raises interest rates further.</p>
</div>
</div>
<h3 id="faq-sensitive-investments" class="card__title" itemprop="name">What investments are most sensitive to interest rate rises?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Almost every asset class on the planet exhibits some evidence of frothiness these days, but some seem more vulnerable to higher interest rates. Although stocks look expensive, higher interest rates indicates that economic growth is firm, and that is good for listed companies. Gold typically loses its shine when interest rates climb, as the metal doesn’t pay any interest like a bank account will, but has already been beaten up heavily recently. The bond market looks more exposed. Highly rated debt is trading with very low yields, which means they are vulnerable to even a modest rise in Fed interest rates, while bonds issued by companies rated “junk” could suffer if more expensive borrowing tips some weaker groups into bankruptcy.</p>
</div>
</div>
<h3 id="faq-what-about-the-yuan" class="card__title" itemprop="name">How does the recent China turmoil affect the Fed’s decision?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>In theory, the Fed makes its decision on raising rates based on its appraisals of domestic economic issues. However, with emerging markets accounting for 39 per cent of global GDP in nominal terms and 52 per cent in purchasing power parity terms, a US monetary policy that enfeebles emerging markets risks depressing global demand and therefore impacting US growth further down the line. This is particularly the case with China. In a specific sense, a Fed rate hike runs the risk of increasing the attractiveness of US-dollar assets relative to those denominated in renminbi, thus accelerating capital outflows from China and leaving Beijing with fewer resources to invest in US Treasury debt.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">What about the UK?</span></h3>
<p></p>
<h3 id="faq-will-the-uk-follow" class="card__title" itemprop="name">Will the UK automatically follow the US in raising rates?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>There is no automatic or formal link between US and UK interest rates but the widespread expectation is that the Bank of England will be the next central bank after the US to raise rates. The UK’s economic recovery is well on track, with solid growth and a strong labour market.</p>
<h4 class="chart-title">The Bank of England typically follows the Federal Reserve's lead</h4>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291287?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291287?profile=original" width="704"></a>Historically, US and UK market interest rates, as measured by government bond yields, have also moved in tandem. These are the rates, set by the financial markets that feed down into the real costs of borrowing for households and companies.</p>
<h4 class="chart-title">Bond yields move in tandem</h4>
<p><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1291303?profile=original"><img class="align-full" src="http://storage.ning.com/topology/rest/1.0/file/get/1291303?profile=original" width="733"></a></p>
<span class="font-size-3"><strong>What are we expecting from UK interest rate rises?</strong></span>
</div>
<div itemprop="text"></div>
</div>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Bank of England governor Mark Carney has stressed that while the next move in rates is likely to be upwards, the path of increases will be “limited and gradual”.</p>
<p>While refusing to be drawn on precise timing, Mr Carney said the decision of whether to start lifting rates was likely to come into “sharper relief” around the turn of the year. Analysts are not predicting the first rise until February at the earliest, with many pushing the timing back into the late spring.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">The rest of the world</span></h3>
<p></p>
<h3 id="faq-what-about-other-central-banks" class="card__title" itemprop="name">Are all major central banks around the world thinking of raising interest rates?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>No. The Bank of England is widely expected to follow the Fed and raise rates, most likely some time in the new year. But as the prolonged weakness in oil prices continues to keep inflation low, many central banks in the rich world are expected to loosen monetary policy further, for example expanding their programmes of quantitative easing. Mario Draghi, president of the European Central Bank, paved the way for an extension of QE last week and the Bank of Japan may well decide to go the same way to bring inflation back to target. In China, the central bank may also cut rates further to stimulate growth. The outlook for emerging markets is harder to gauge: were a Fed hike to trigger turmoil across Africa, Asia and Latin America, countries there may choose to cut rates to help the economy, or increase them in order to dissuade investors from taking their money abroad.</p>
</div>
</div>
<h3 id="faq-what-about-emerging-markets" class="card__title" itemprop="name">Why would a rate rise in the US impact the emerging market countries?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>We have already seen the antecedents of the main impact: a stronger US dollar, backed by higher US interest rates, tends to depress the values of emerging market currencies at a time when many EM economies are already weakening and their currencies have already slumped against the greenback.The Fed’s rate rise could exacerbate the EM currency turmoil, and even help precipitate a full-blown crisis.</p>
</div>
</div>
<p></p>
<h3 class="section__subtitle"><span class="font-size-6">Jargon buster</span></h3>
<p></p>
<h3 id="faq-what-is-tightening" class="card__title" itemprop="name">What is <em>tightening</em> and <em>loosening</em>?</h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>When a central bank “loosens” or “eases” policy it essentially increases the supply of money in the economy and pushes down the cost of borrowing. This could be by lowering interest rates, or buying more assets with the aim of putting more money into circulation and encouraging greater economic activity.</p>
<p>“Tightening” is the opposite. If policymakers worry that an economy is begin to overheat, potentially generating too much inflation, they can tighten policy – such as raising the interest rate they charge banks to borrow from them, to make the cost of credit more expensive.</p>
<p>Changes to interest rates can take-up to 18 months to feed through into the real economy.</p>
</div>
</div>
<h3 id="faq-what-is-monetary-policy" class="card__title" itemprop="name"><span class="font-size-6">What is monetary policy?</span></h3>
<div class="card__body" itemprop="suggestedAnswer acceptedAnswer" itemscope="" itemtype="http://schema.org/Answer">
<div itemprop="text">
<p>Central bankers control more than just interest rates. “Monetary policy” is a broad brush term for a whole range of actions, including things like selling or buying assets such as government bonds, raising or reducing the amount of capital banks need to hold against liabilities, and raising or lowering interest rates.</p>
<p>All of these actions impact the cost and supply of money in an economy which are the main levers central banks use to try and keep inflation at its target level and the economy growing at a sustainable speed.</p>
<p>Changes in monetary policy can take-up to 18 months to feed through into the real economy.</p>
<p>See more at <a href="http://ig.ft.com/sites/when-rates-rise/#faq" target="_blank">ft.com</a></p>
</div>
</div>
<p></p></div>Take A Moment To Reviewhttp://stockbuz.ning.com/articles/take-a-moment-to-review2014-10-26T22:52:07.000Z2014-10-26T22:52:07.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p>Let’s take a moment and put the market’s current trading action into perspective. Earlier this year bullish sentiment reached levels not seen in years or even decades depending upon data source. Market volatility had also fallen to levels not seen in years as the market was steadily making new all-times highs. S&P 500 actually went 63 trading days without a 1% percent daily move higher or lower. A feat last accomplished in 1995. And it has been more than three years without a 10% or greater S&P 500 correction. This is four times the average duration of time between corrections. Not to mention the market shrugged off tensions in Ukraine, Ebola in West Africa, the rise of ISIS in the Middle East, slowing global growth concerns and the Fed slowly easing up on stimulus. Honestly the market had gotten ahead of itself and was in need of a cool-off period. More likely than not, that is what it is doing.<br />
<br />
Yes, weak economic data out of Asia and Europe is a concern as they are major U.S. trading partners, but that weakness has not yet materialized in U.S. manufacturing reports. Just yesterday Industrial Production was reported to have climbed 1% in September. This was better than twice the consensus estimate of 0.4%. This report was further supported by the Philadelphia Fed manufacturing index climbing to 20.7, again besting expectations. Furthermore, weekly initial jobless claims fell to 264,000 last week, the lowest reading since 2000. If business activity was slowing due to weakness overseas, it would stand to reason that weekly claims would be rising, not falling as employers began cutting employees.</p>
<p>Of course U.S. mid term elections are a little over a week away.  What Congressman wants to see the S&P500 failing going into that? </p>
<p>75% of companies who have reported thus far are beating estimates although guidance seems lackluster in many areas.  CNBS (sic) will intentionally parade the "beats" in an effort to <span style="text-decoration: line-through;">cheer lead</span> promote risk appetite.</p>
<p>Commodities are, for the most part, in a bear market and crude oil is looking like a bearish flag.  Another drop lower won't help support the market.  To the contrary, any reported fighting near oil fields or disruption in oil supplies could create a vicious short-covering rally.  We can only watch the news for this.  Not worth a bet.</p>
<p>EU bank stress tests have been released with 20% failing to meet requirements.  Are their lows near?<br />
<br />
Ebola is also an issue, but honestly it feels as if the media is causing more harm than good. Not so many weeks ago it was ISIS or ISIL that was going to destroy the world, now it is Ebola. The reality is the “outbreak” that they constantly speak of is three patients in the U.S. Unfortunately the medical community was not as prepared as they thought they were. Their initial mistakes and miscues have prompted action and it now appears they are getting better organized to deal with any future patients. A full-blown global pandemic just does not seem all that probable.<br />
<br />
Perhaps more than any other issue or concern out there, European markets appear disappointed that the ECB has not done more and in turn Asian and U.S. markets are suffering. Honestly, it is somewhat puzzling that the ECB has not moved from merely words to a more decisive plan of taking action. The region is on the verge of its third recession in six years and deflation is refusing to abate. Sovereign debt levels maybe high now, but deflation and a lack of growth are not going to help this situation at all. Should the ECB step up (which it was rumored they would in January 2015), the current market rout could end just as quickly as it started.</p>
<p>Hat tip <a href="http://blog.stocktradersalmanac.com/post/Lets-All-Take-a-Deep-Breath-SPY-DIA-QQQ" target="_blank">Stocktradersalmanac</a></p>
</div>Looking Back At The Markethttp://stockbuz.ning.com/articles/looking-back-at-the-market2014-10-05T23:01:03.000Z2014-10-05T23:01:03.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><p><a target="_blank" href="http://www.frugal-cafe.com/public_html/frugal-blog/frugal-cafe-blogzone/wp-content/uploads/2011/10/halloween-european-debt-crisis-political-cartoon.jpg"><img class="align-left" src="http://www.frugal-cafe.com/public_html/frugal-blog/frugal-cafe-blogzone/wp-content/uploads/2011/10/halloween-european-debt-crisis-political-cartoon.jpg?width=500" width="500" /></a>The ECB left its key lending rates at record low levels, and the four-week moving average for initial claims is at an eight-year low.  That sounds like a pretty good setup for a stock market that worries about earnings prospects tied to a stronger dollar, loves the thought of central bank policy rates holding near the zero bound, and is anxious to see evidence the U.S. economy is gaining momentum.<br />
<br />
Despite the setup, it has been a swing and a miss so far for the stock market, which has once again been greeted with steady, and broad-based, selling pressure.<br />
<br />
ECB President Mario Draghi is getting a lot of blame for the disappointing price action based on reports that his presentation regarding the ECB's asset-backed securities purchase program was lacking and the impression from today's press conference that the ECB's ability to change the economic dynamic in the eurozone is also lacking.<br />
<br />
There is some merit to the latter claim given the seeming lack of urgency to implement structural reforms in the eurozone, yet that is just one element that has kept buyers on the sideline.<br />
<br />
The primary element is that the stock market just isn't acting well.  That's a simple deduction we know, but so many participants have been conditioned to expect a strong, buy-the-dip trade on just about any dip that the lack of that trade has been off-putting and interpreted as a deeper-seated effort to reduce risk exposure.<br />
<br />
With the S&P 500 down nearly 4.0% over the last month and the Dow flirting with turning negative for the year, the narrative that the stock market is oversold and that this pullback is a "healthy" pullback is apt to start gathering some steam. <br />
<br />
The setup is there to come back and buy on the recent, big dip: the Fed isn't going to raise interest rates anytime soon, we'll soon see that earnings grew once again in the third quarter and probably grew more than expected, and there are reportedly a lot of underperforming money managers chomping at the bit to buy on a pullback.<br />
<br />
The stock market is hitting an important inflection point.  The failure to live up to the buy-the-dip expectations needs to be eradicated soon or October could turn spooky and it won't have anything to do with Halloween. </p>
<div style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">Courtesy of <a href="http://www.briefing.com/Investor/PopupPages/ArticlePopup.aspx?ArticleId=IN20141002120807TALKX#ixzz3FJXYKdMk" target="_blank">Briefing.com</a></div>
</div>The Draghi Squeezehttp://stockbuz.ning.com/articles/the-draghi-squeeze2014-06-04T17:49:17.000Z2014-06-04T17:49:17.000ZStockBuzhttp://stockbuz.ning.com/members/1t2xbcvddkrir<div><address><a target="_self" href="http://storage.ning.com/topology/rest/1.0/file/get/1290751?profile=original"><img class="align-right" src="http://storage.ning.com/topology/rest/1.0/file/get/1290751?profile=RESIZE_1024x1024" width="750"></a>Sectors are squeezing higher in anticipation of ECB rate decision, expected to cut rates another 25-50bp (negative rates - wow) and possibly announcing LTRO (long-term refinancing operations) tomorrow before U.S. markets open in an effort to reign in inflationary pressures across the pond. I would assume much of this has been "baked in" however $1941 remains very doable.</address>
<address>One thing for certain if they don't, it will be ugly........but I'll still buy the dip.</address></div>