Sunday, November 02, 2014

QE ends ... and QE begins

In response to the growing concern about European weakness, the European Central Bank took action earlier in the month by buying bonds which essentially implemented quantitative easing. This will cause European interest rates to fall, and that in turn puts downward pressure on the Euro relative to other currencies including the Japanese Yen.

Now, if you are Japan and looking to export some Hondas, the last thing you need to happen is for the Euro to depreciate relative to the Yen. In order to prevent this, the Japanese Central Bank put on their Godzilla costume for Halloween and joined the fray with an unanticipated round of bond buying.

Effectively, the Central Bank of Japan is going to buy on the open market more than double the amount of new bonds issued by the Japanese Government. This level of stimulus makes the Federal Reserve's latest round of quantitative easing which ended this month look timid by comparison.

So effectively, the weakness in Europe caused the European Central Bank to push interest rates down. Japan, not wanting their currency to appreciate, responded by pushing their interest rates even lower.

Excellent news for stocks.

I don't know if this is going to help sell more Mercedes or Hondas, but I do know that the net result of the race to depreciate currency is to pull global interest rates much lower for much longer than investors are anticipating. This is a positive development for stocks and most other financial assets over the next few quarters.

-- Mitch Zacks, ZIM Weekly Update

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