Monday, January 26, 2015

Q€ Is Mostly About Depressing the Euro (excerpt)

In the beginning, the Lord said, “Let there be light.” And there was light. Then in 2008, Ben Bernanke said, “Let there be NZIRP and QE.” And the Earth’s dark financial chaos ended as near-zero interest-rate policy and quantitative easing lit the way to recovery. Last week, Mario Dragi said, “Let there be Q€.” And the euro continued to plunge. Eurozone stocks continued to rally on hopes that Q€ will revive the region’s economy and avert deflation. If it works, light will replace darkness in the Eurozone. Currently, I’m not a believer, but I am willing to move from the dark side to the light side if I see some light at the end of the Eurozone’s economic tunnel.

The euro plummeted to $1.12 on Friday, the lowest since September 17, 2003, and down 20% from last year’s high of $1.39 on May 7. Now that the euro is trading more like the drachma than like the Deutsche mark, everyone seems to expect that it is heading for parity with the dollar, which would be a 28% decline from last year’s high.

I began to speculate about that possibility last summer. As I’ve noted before, Draghi first started talking the euro down at his 8/7 press conference last year. In his Q&A comments, he said that “the fundamentals for a weaker exchange rate are today much better than they were two or three months ago.”

Meanwhile, the trade-weighted dollar continues to soar, rising 2.4% since the start of the year and 13.6% since last year’s low on July 1. The EMU MSCI in euros is now up 7.8% ytd, following last year’s lackluster gain of 2.3%. It is outpacing the US MSCI, which is up 1.6% ytd following last year’s 11.1% rise. However, the EMU MSCI in dollars is up just 0.3% ytd following last year’s drop of 10.2%. As was demonstrated in the US and Japan, QE is bullish for stocks, but its stimulative impact on nominal GDP remains debatable.

Today's Morning Briefing: Q€. (1) After the darkness, there was light. (2) Euro is trading more like drachma than D-mark. (3) QE still lifts stock and bond prices. (4) Good to be a Bond King. (5) Paying for the privilege of lending money. (6) Still betting on one-and-done. (7) Draghi’s shock-and-awe. (8) Open-ended Q€. (9) Greeks vote, while ECB does not. (10) Eurozone stats still mostly stagnating. (11) Performance Derby. (12) “Birdman” (+). (More for subscribers.)

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