But the European Central Bank’s new €60bn/month ($65bn) programme doesn’t seem to be providing the same support for US equities as before, as the chart shows:
- The S&P 500 initially responded positively to the ECB announcement, rising 2.5% by mid-February (red line)
- But it ended hardly changed on 31 March at 2067, versus 2058 at the start of the year
- Suddenly profit forecasts for energy companies began to tumble, as oil failed to rally
- And then export-dependent companies hit strong headwinds from the strength of the $
Equally worrying is the renewed downturn in the US economy, which the Atlanta Federal Reserve’s snap indicator of Q1 GDP indicates is currently at 0.1% growth.
This, of course, is far from consensus forecasts, which assumed that Quantitative Easing had finally caused the US economy to return to SuperCycle growth mode. It also undermines the belief that QE is therefore the key to future success for the Eurozone and Japanese economies.
Of course, central banks and their followers will rush to point out – yet again – that special circumstances have somehow created a one-off effect. But this excuse is wearing very thin, as even the deputy chairman of the US Federal Reserve, Stanley Fischer admitted last August:
“Year after year we have had to explain from mid-year on why the global growth rate has been lower than predicted as little as two quarters back”
Of course, history would suggest this means we should simply prepare for another US Federal Reserve round of free cash, even bigger than those before. But for the moment, it is worth watching the Index, to see if it can maintain current levels despite the weakening background in the real economy.
Meanwhile, the damage continues to the real economy. Larry Fink, CEO of Blackrock, the world’s largest asset manager wrote to his shareholders this week highlighting:
“The risk that monetary easing has inflated asset bubbles as investors such as pension funds searching for yield in a low interest rate environment are pushed into riskier asset classes. The situation is ‘worsening every day’.
“This mix of growing assets and shrinking yields is creating a dangerous imbalance. Yet monetary policy makers seem insufficiently attuned to the conundrum their actions are creating for investors: reach for yield and continue to fuel an expanding bubble, or remain on the sidelines and watch unfunded liabilities grow unchecked.”