The ECB Bazooka of January 22nd, 2015

Dear PGM Capital Blog readers,
On Thursday, January 22nd, the “European Central Bank“ (ECB) ‘took out the bazooka’ with bigger than expected QE stimulus package.

The ECB chairman, Mr. Draghi, said the ECB would buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.

The purchases of government bonds and those issued by European institutions such as the European Investment Bank will start in March and are intended to run through to September 2016. Mr. Draghi signaled the purchases could extend further if the ECB isn’t meeting its inflation target of just below 2%.

As can be seen from below 5-day chart, the Euro fell on the news against most world currencies; like the US-Dollar, Swiss Frank and British pound.

 

MARKETS REACTION:
The ECB decision roiled markets around the world.

Greek shares led European stock markets higher ahead of Sunday’s elections, while the euro slid to an 11-year low against the dollar, in the wake of the European Central Bank’s decision to unleash a huge bond-buying program.

Stock and bond markets around the world were given a shot in the arm by the ECB’s bigger than expected €1.1tn quantitative easing round to fight deflation and revive the ailing euro zone economy.

European shares are heading for their best week in three years.

As can seen in below chart, the German DAX and Dutch AEX, respectively the world’s second and fourth biggest exporters, rose sharply on the news for which the German DAX rose for the week with 436 points or 4.27 percent to an all time high of 10,649.58 points.

PRECIOUS METALS REACTION:
Gold and silver which are the ultimate hedge against inflation rose sharply on the news.

Spot gold, rose after Draghi’s announcement, to the highest since Aug. 15 at US$1,306.20 an ounce. At 2:54 p.m. EST (1954 GMT) it was up 0.8 percent at $1,303.50.

Priced in Euros, the price of Gold has risen with approx. 18 percent since January 1st this year as can be seen from below 30-day chart.

Silver, nicknamed as poor-man’s gold, did even better! Priced in Euros, the price of Silver has risen with approx. 20 percent since the beginning of this year, as can be seen from below chart.

Measured in US-Dollars, Gold and Silver appreciated in the first 3 weeks of January 2015, with respectively 9.5% and 17% as can be seen from below charts.

PGM CAPITAL COMMENTS:
With Thursday’s move, which was more aggressive than financial markets had expected, Mr. Draghi passed the baton to governments to take the lead in restoring prosperity to the region’s economy.

Some business leaders shared the ECB chief’s assessment. “We have seen QE in the U.S. and Japan, but the key is structural reform. Without that it may not work and I see little sign (of structural reform) in key countries like France and Italy,” said Sir Martin Sorrell, chief executive of multinational advertising firm WPP.

The ECB’s move “was positive and it was needed,” said Francisco González, chairman of Spanish bank BBVA. He praised the slightly-larger-than-expected size of the ECB’s announced operation. “Having said that, governments have to keep with reforms for the plan to meet its purpose,” he said.

In a nod to concerns in healthier euro countries over the prospect of assuming risks tied to their neighbours’ debts, the ECB said government bonds will be mostly purchased by national central banks and excluded from potential loss sharing. Credit risks associated with the bonds of European Union institutions will be shared, however, “We are not in a one-country setup,” Mr. Draghi said.

Based on this statement and below table we can conclude that purchases of German, French and Italian debts will make up most of the announced ECB QE program as announced last Thursday January 22nd 2015.

The above table shows that the ECB plan is complicating 19 nation bond markets, with varying degrees of risks.

The lessons we should have learned from the SWISS Bazooka of last week and the ECB Bazooka of this week are the following;

In a world dominated by currency war, Stimulus and Quantitative Easing programs by Central banks:

• Gold Silver and other precious metals are the ultimate safe haven, which means that every portfolio must have at least 30 percent of physical Gold as a hedge against the current currency war and subsequent dilution of purchasing power of the FIAT currency.
  –The appreciation of Gold & Silver with approx. 20 percent in Euros, in the first 3 weeks of 2015, is a loud and clear message for investors who, have ever doubt the role of Gold and silver as a Hedge against inflation-
• Contradictory for what we have learned in school, when bush comes to shove, securities related to hard assets rise more value when the currency in which they are notated as decreased in value.
  -The fact that Quality European stocks have risen during the week more, than the Euro have depreciated, clearly proves that in the era of zero to negative interest rates, having Quality stocks in a portfolio is less risky than holding cash.

The Ministry of Finance of Japan reported that the country bought JPY 657 billion (over 5.6 billion US Dollars) of foreign stocks in the week of January 12th. That is the biggest weekly purchase of foreign equities since records began in 2001. The huge size of the purchases- more than double the average size of recent weekly purchases – appears to have been ‘spent’ on European stocks as can be seen on below chart

The above mentioned trade of The Bank of Japan’s (BoJ) can be seen as a front-running act, of  dumping Cash, selling  US Stocks and buying High Quality European Stocks in order to profit the most of, Mr. Draghi’s QE program of last Thursday.

Last but not least keep in mind that the market can remain irrational longer, than you can remain solvent.