WASHINGTON, June 5, 2014 – The European Central Bank (ECB) announced this morning a pair of disappointingly modest actions geared toward stimulating the largely moribund European economies.
In short, the ECB cut it main interest rate from 0.25% to 0.15%; and, perhaps somewhat more dramatically, cut its deposit rate to below zero, setting it at -0.1%, making it the first central bank to enter negative territory on that rate. This means that banks depositing funds with the ECB will actually have to pay a bit for doing so.
The meeting of the ECB is still ongoing and the central bank’s current president, Mario Draghi, is expected to announce some easing in long term financing constraints on small businesses which, like small businesses and individuals in the U.S., have been largely locked out of such loans for years—essentially why neither the U.S. nor the European “recoveries” have gained much traction, aside from the holdings of the wealthy and connected who have always been able to access such loans.
U.S. market pre-market numbers indicated a reasonably positive opening is in store this morning, with Dow futures up 28, S&P 500 futures up 1.75 and NASDAQ numbers up 3.20 as of 8:10 a.m. EDT. These figures will likely fluctuate considerably before the 9:30 bell. But the numbers are a relief to many who’ve become used to the ECB doing little to juice the continent’s economies aside from predictable jawboning.
On other fronts this morning, telecoms and mergers are again in the news, primarily due to Sprint’s (S) announcement of a preliminary deal to acquire smaller rival T-Mobile (TMUS) for a package worth an estimated $40 per T-Mobile share for a total of $32 billion.
Obviously, the proposed deal will need to go through an exhaustive regulatory review which could result in a few spectrum or territory shifts before it’s over. But the generally trust- and monopoly-hostile Administration has sent modest signals that the Federal government might not oppose Sprint’s offer, given the overwhelming dominance of Verizon and AT&T in the domestic wireless arena.
Influenced by the ECB’s intentions, the Euro is very slightly down this morning, gold is slightly off and bonds are thus far indecisive, though U.S. bonds—weak for several sessions—could finally catch a bid as the day progresses.
Today’s trading tips
Let this ECB move play out a bit before getting too excited one way or the other. The market has surprised us with a bullish bias since around mid-May at least which is generally counter-trend. More worrying is the low volume that’s accompanied this slow but steady markup.
More and more, corporate “profitability” in many companies seems more involved with corporate stock buybacks made easy by the buckets of essentially free money the Fed’s been handing out to larger corporations and banking institutions that have to park it somewhere. Buybacks are one way of goosing your company’s stock prices in lieu of lack of growth. So all these earnings “beats,” or at least some of them lately, are suspect to us. They don’t reflect real growth, which could at least in part be why investors aren’t heavier buyers here.
We’re also keeping an eye on our small stable of REITs and preferred stocks. Interest sensitive creatures, they’ve been weak this week, perhaps a predictor that, as European rates rise, if only by a fraction of a percentage point, U.S. rates will increase as QE comes to an end this autumn. This, of course, drives bond prices down. But REITs and preferreds often follow as they too, like bonds, are interest rate sensitive due to their high yields.
As a result, instead of doing much buying for the remaining trading hours this week, we will likely look to offload a couple of profitable bond positions.
Otherwise, we’ll wait for the rest of the ECB’s remarks for a little bit of color, and stand back and see what Mr. Market and the HFTs feel like doing before we make too many moves.
Stay cautious and liquid.