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An early Spring

Brouwer & JanachowskiMarch 11, 2016

Markets ended the week firmer. The S&P 500 traded 2,000, roughly where it was fourteen months ago but up 7% from February lows. Nearly all markets experienced a bounce from just four weeks ago: Small Caps were up 11%, Emerging Markets up 9% and REITS up 8%. Why?

  1. European Central Bank: no one was expecting caution from the ECB and it delivered a hammer blow on Thursday. They dropped interest rates on refinancing rate to 0%, lending to 0.25% and deposits to -0.4%. So, we’re deep into negative territory now. Here's a chart from ANZ showing negative rates for bonds maturing up to ten years. It’s nearly half the market.1 6565

There is much debate about negative rates. A race to the bottom or justified policy tool? We think that, yes, it messes with discount rates and institutions with long-term liabilities, but it has yet to affect retail depositors. In other words, it’s still an experiment to push these economies anywhere beyond torpor.


  1. Wait but that’s not all: the ECB wasn't finished. It announced its monthly repurchase program would increase to nearly $90bn. The Fed’s peak was $80bn for an economy roughly the same size. Finally, they announced they would buy investment grade bonds. As one commentator noted, the market ‘aint broke and didn't need fixing. This is one move the Fed would never have dared (“it’s back door nationalization”!). But the ECB is serious. The market reaction? The Euro immediately dived but recovered. The German stock market rose 2% and then fell 6%. We think, however, it's good for equities.
  1. Oil: rebounded and is now 50% off its mid-January bottom. But that's the spot price. Spot prices move in reaction to very short-term demand. A refinery may be operating below capacity. A terminal may be full. The curve in contango. Here’s the very big picture on oil demand and supply courtesy of the IEA this week:2 6565

But there is a lot more going on in the market: summer refining, storage capacity problems, inventory, hedge fund short positions, cost savings, where the tankers are, Hillary on fracking… We’re glad to see the rebound. But we're not out of the woods.

Bottom Line: We are finally seeing some welcome reversals. Small cap is outperforming large cap and Emerging Markets outperforming domestic. Both markets were oversold. The all-important Ten-Year Treasury remains in a bull phase. But markets everywhere are very event driven.


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--Christian Thwaites, Brouwer & Janachowski, LLC


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