The European Central Bank (“ECB”) declared negative interest rates last week. That does not mean the bank will pay you to borrow money, so don’t bother trying to capitalize on this news by taking out a loan in euros. Instead, the ECB will impose an interest rate of -0.1% on the reserves other banks park at the central bank. Banks will effectively be charged a 0.1% fee as opposed to receiving interest from the ECB. In theory, this should encourage banks to lend money to customers instead of paying the ECB to safeguard it.
This action spurred European stocks higher, which spilled over to U.S. bank stocks and pulled the whole market higher. Unlike the new highs U.S. stocks are making, eurozone stocks need to climb another 44% to hit a new record (or 14% with six-and-a-half year’s worth of dividends included). European bonds are another story, as they went from default levels during the European crisis to new highs this week. The ECB interest rate action is in line with Draghi’s pledge from two years ago “to do whatever it takes” to preserve the euro. However, the ECB’s hope that below-zero interest rates would weaken the euro was not immediately evident. “Draghi’s gone all-in today,” Owen Callan, an analyst at Danske Bank in Dublin, told Bloomberg News. “Don’t think of this as a bazooka. This is more like a fleet of killer drones to target deflation from all angles.”
Domestic economic news continues to be mostly positive. Payrolls finally surpassed their pre-recession levels in May, ending a 76-month long slump. The bad news is that it took much longer than the other nine recoveries of the past 70 years and three times longer than their 24-month average. Despite the hoopla surrounding the payroll report, the Household Survey indicated that only 145,000 additional civilians now count themselves as employed. This failed to keep pace with a population increase of 183,000 for the month. May also saw 9,000 people leave the labor force. The results being an official unemployment rate of 6.3% and a participation rate of 62.8%, both figures unchanged from April.
North America’s extremely harsh winter has been a convenient excuse for any company failing to meet expectations this year. Today, the World Bank jumped on the bandwagon, citing it as a primary reason for lowering its global growth forecast from 3.2% to 2.8% for the year. The ongoing conflict in Ukraine was also a contributing factor. Improving labor markets, pent-up consumer and industrial demand, and reduced impacts of government spending cuts were seen as positives going forward.
The Federal Reserve’s Open Market Committee meets again next week. Current consensus points toward another $10 billion tapering of the Fed’s asset purchase program, taking the pace down to $35 billion per month.
Last week’s ranking logjam, which resulted in eight sector categories involved in various ties, has been dislodged with all eleven categories having a unique score today. Energy now claims the top spot, a position it held for a week in early May but relinquished to Real Estate the past three weeks. Industrials jumped six spots to grab 2nd place on strength in defense contractors and small cap manufacturing. Technology racks up its fourth straight week in 3rd place and shows no sign of vacating that position. Materials held its position, and like Industrials, benefited from small company strength. Real Estate was at the top a week ago but lost a couple of momentum points while other sectors moved ahead, resulting in a drop to 5th place. The Financials sector has been lagging for two solid months but came alive this week and climbed four spots. Health Care held steady in the lower half of the rankings despite the blistering surge in some small cap biotechnology stocks. Utilities lost more ground and is now located in the lower tier. Telecom dropped two spots to replace Consumer Discretionary on the bottom.
It was a week where small cap stocks blazed ahead, vastly outperforming their larger brethren. However, small cap stocks had fallen so far behind in April and May that last week’s spectacular performance did not change the rankings. Mid Cap Value had a good week and kept its top ranking. Mid Cap Blend climbed two spots to form a three-way tie for second place with Large Cap Value and Large Cap Blend. Large Cap Growth and Mega Cap both slid one position to make room for the rise of Mid Cap Blend. As mentioned earlier, the four smallest capitalization categories still occupy the bottom four slots. However, their strong showing eliminated the negative momentum readings, making the charts all green for the first time in seven months.
Our diversified Emerging Markets benchmark reclaimed the top spot that it only held for one week before losing it for the same length of time. China was responsible for knocking down Emerging Markets in our last update when it leapt from 10th to 1st, and today China settled back to 2nd place. Latin America was the big mover this week, surging from last to third and placing the three developing market categories squarely in the leadership role. These were the bottom three just a few months ago, making for a dramatic turnaround. The U.S. heads up the developed markets with its 4th place position, and Europe climbed three spots to be next in line. World Equity fell three spots to the middle of the pack. Japan fell and Canada climbed to form a tie in the lower portion of the rankings. EAFE, Pacific ex-Japan, and the U.K. all fell two places or more to become the new bottom dwellers.
“Are we finished? The answer is no.”
ECB President Mario Draghi on June 5, 2014
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