-- Daily Gains Letter (www.DailyGainsLetter.com), an e-letter of Lombardi Publishing Corporation, a 28-year-old consumer publisher that has served over one million customers in 141 countries, is weighing in on recent actions by the European Central Bank (ECB) and how they could boost U.S. markets.
In early October, the ECB said it was cutting its benchmark interest rate to 0.05% and announced new stimulus measures. President Mario Draghi revealed the ECB would start buying covered bonds in the middle of October and asset-backed securities in the fourth quarter; but left open the size of the measures. (Source: Smith, G., “ECB cuts benchmark rate to 0.05% in surprise move,” Fortune web site, September 4, 2014; http://fortune.com/2014/09/04/ecb-cuts-benchmark-rate-to-0-05-in-surprise-move/.)
The move comes two weeks after the Organisation for Economic Co-operation and Development (OECD) cut its outlook for the eurozone’s gross domestic product growth to 0.8% this year and just 1.1% for 2015. (Source: “Global growth continuing at a moderate pace, OECD says,” Organisation for Economic Co-operation and Development web site, September 15, 2014.)
“The ECB is hoping to fight the region’s economic slowdown by lowering its benchmark interest rate in much the same way that the U.S., England, and Japan did,” says Daily Gains Letter financial analyst Moe Zulfiqar. “It is expected that low interest rates will encourage lending, which will, in turn, stimulate economic growth. Echoing the U.S. Federal Reserve, the ECB also announced it will be taking part in an asset purchase program.”
Zulfiqar explains that the ECB is lowering its interest rates at the same time the Federal Reserve and others, like the Bank of England, are taking steps to raise theirs. The Bank of England has hinted it could raise interest rates in spring 2015; the U.S. Federal Reserve has suggested it will also raise rates in 2015, though the precise timing is unclear, says Zulfiqar.
“During the financial crisis in 2008, the Federal Reserve lowered their interest rates,” he adds. “Investors in search of higher yields simply moved the cheap money to emerging markets for short-term gains. It made perfect economic sense for investors and businesses to borrow money at three percent interest and invest it in emerging markets, like India, for six percent interest.”
“There is a similar pattern emerging now that the ECB is lowering rates: investors will borrow cheap money in the eurozone and invest it elsewhere. But instead of investing in emerging markets, the money will be better served flowing into developed countries that are looking to raise interest rates, like the U.S. and England,” Zulfiqar concludes. “If this scenario plays out, investors can look at developed market exchange-traded funds. Or, once interest rates start to move, investors might want to consider long-term U.S. bonds.”
For more information on Daily Gains Letter, visit www.DailyGainsLetter.com.
Founded in 1986, Lombardi Publishing Corporation, which has served over one million customers in 141 countries, is one of the largest consumer information publishers in the world. For more information on Lombardi Publishing Corporation, visit www.lombardipublishing.com.
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