What The Financial Markets Hate Most Is Uncertainty

What The Financial Markets Hate Most Is Uncertainty

$DIA, $SPY, $QQQ, $VXX

The most significant monetary policy information should come from ECB this week after the 10 March meeting and the press conference of ECB President Mario Draghi. This is what the  financial markets are focused on now.

Mr. Draghi has made it clear the ECB will do all it can to obtain, within its mandate, to achieve its objective of inflation rates below, but close to 2% over the medium term.

The Big Q: How?

Right now the Euro Finance Ministers are meeting in Brussels, but any hope for constructive action from them will be limited given their history.

The EU Finance Ministers talk about reform, Mr. Draghi pursues radical policies justifying the more questionable economics and the European Finance Ministers then sit back and adhere more-or-less to the mistaken belief that the ECB is a substitute for structural reform.

For long-term investors who have an eye on Euroarea markets keep in mind this is why the Euroarea can readily achieve a cyclical recovery, but it has made little/no progress managing a structural recovery.

One economist I read says, “Unless the ECB starts to put in place a policy based on economic reality and notwithstanding we’ve seen some growing interests for reform on part of the Finance Ministers this unfortunate game seems set to continue to play out , which is, and until that changes not a sound basis for justifying overall longer-term investments in the zone.”

The Bank for International Settlements (BIS) warns on the consequences of negative interest rates suggesting that they are at least unpredictable and potentially damaging to the longer and the more negative that they go.

The FT warned: “If negative policy rates do not feed into lending rates for households and firms, they largely lose their rationale. On the other hand, if negative policy rates are transmitted to lending rates for firms and households, then there will be knock-on effects on bank profitability unless negative rates are also imposed on deposits, raising questions as to the stability of the retail deposit base.”

Recall, that the Bank of England (BOE) Governor Mark Carney’s criticized recently in a prepared speech, countries that had adopted negative rates: “… when negative rates are implemented in ways that insulate retail customers, shutting off the cash flow and other channels that mainly affect domestic demand, while allowing wholesale rates to adjust, their main effect is through the exchange rate channel … From an individual country’s perspective this might be an attractive route to boost activity. But for the world as a whole, this export of excess saving and transfer of demand weakness elsewhere is ultimately a zero sum game. Moreover, to the extent, it pushes greater savings onto the global markets, global short-term equilibrium rates would fall further, pulling the global economy closer to a liquidity trap. At the global zero bound, there is no free lunch.”

He meant that the use of negative deposit rates the way it is done now bordered on currency manipulation.

The financial markets will soon know what the ECB is up to. And perhaps long-term investors should remain cautious and patient while hoping we do not come closer to a currency war.

What is certain today is uncertainty, that is no one’s friend for long-term investing.

Monday, the US major stock market indexes finished at: DJIA +67.18 at 17073.95, NAS Comp -8.77 at 4708.25, S&P 500 +1.77 at 2001.76

Volume: Trade was heavy with more than 1.10-B/shares exchanged on the NYSE

• NAS Comp -6.0% YTD
• Russell 2000 -3.8% YTD
• S&P 500 -2.1% YTD
• DJIA -2.0% YTD

Stay tuned…

HeffX-LTN

Paul Ebeling

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