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Chameleon Asset Strategies Blog

Performance Enhancing Policies in Europe, Fed meeting Tuesday & Wednesday

15 Mar 16 Written by  Published in Blog
Performance Enhancing Policies in Europe, Fed meeting Tuesday & Wednesday

On Thursday of last week, the ECB announced even more robust stimulus measures. They increased their asset purchase program from 60 to 80 billion Euros a month and broadened the scope of the assets that they’re able to purchase. They dropped their interest rates even further into negative territory and exercised additional creativity to address bank balance sheet vulnerabilities. This was an impressive policy response which has real merit in terms of being able to mitigate systemic risk in the European banking system.

On the flip side of this coin, one would conclude that economic conditions in Europe continue to be mediocre/unfavorable to the point that these measures were required. I do believe that they’ve managed to eliminate some of the systemic risks associated with debt tied to depressed commodity producers however this “bazooka” as it’s being called, further impedes day to day banking operations and profits. People are also wondering whether the ECB has any further capabilities should the intended outcome not be achieved. Given the controversy over these actions, I think that support for further easing and stimulus is virtually non-existent.

The Federal reserve will be meeting again this week to discuss domestic economic activity and their proposed path for interest rates in the future.  I’m not going to attempt to speculate on their conversation and the ensuing market reaction. I will however say that the 10 year Treasury yield has increased very significantly in the last few months and now has a great deal of room to move back down if they leave the door open. On a relative value basis as compared to the German equivalent, our 10 yr is now even more attractive and I would look for the spread to narrow as opposed to moving further apart. 

I think that the recent rally in the price of oil and other key commodities has given equity markets quite a bit of leash to move up however I am still far more interested in taking short positions at these levels than chasing momentum and hoping that they can break through the fortress of resistance above. The risk remains to the downside as global growth appears to continue on a contracting glide. The gameplan this week is the same as last – I’ll be looking for quality opportunities to sell equities and buy Treasuries and Gold. A close in oil below $36 will likely bring quite a bit of fear back the market.   

 

All the best,

Stephen

 

Read 388 times Last modified on Tuesday, 15 March 2016 16:35
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