Don’t Fight the Fed ECB? (Part 1 of 2)

Weekly Market Commentary 9-15-14

The European Central Bank (ECB) announced bold stimulus measures, including further cuts to key interest rates and an asset-backed securities (ABS) purchase plan, on September 4, 2014. The moves are an acknowledgment of the recent deterioration in the Eurozone economy and increased deflation risk. This decision follows the historic move to negative deposit rates initiated back in June of 2014. These measures are geared toward spurring economic growth through easier access to cheaper credit for businesses and households and toward driving prices higher to avoid deflation. These moves may also continue to pressure the euro currency and help boost European exports.

Is this move by the ECB a buy signal for European equities? To help answer that question, we look back at how U.S. stocks reacted to our own monetary stimulus through quantitative easing (QE). Although Europe has not engaged in outright QE (where the ECB buys government bonds directly), it may in the future. With essentially zero interest rates (or lower), and the addition of bond purchases, these ECB moves are similar to the Federal Reserve’s (Fed) moves.

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