January 2015 Market Update
2015 has been a month of surprises. The markets continued to responded an ongoing fall in oil prices; the Swiss Franc suddenly departed from a 3 year policy of being pegged to the Euro, resulting in a 30% leap in the value of the Franc almost instantaneously; the European Central Bank (ECB) announced the details of its quantitative easing program (QE); and finally, the Bank of Canada announced a 0.25% rate cut, much to the surprise of many.
I have talked about oil and its effect on the economy in previous commentaries. In January the price of oil continued to slide and remains quite volatile due to weakening global demand, a surge in US oil production, a surprisingly resilient supply from the Middle East and a stronger US dollar. Overall however, the US economy has benefited from increased consumer confidence as a consequence lower oil prices.
Globally, central bank action has dominated the markets in January. First, the Swiss National Bank (SNB) surprised currency speculators everywhere with what’s been dubbed “Francogeddon” when they suddenly scrapped their cornerstone policy of capping the Swiss Franc/Euros exchange rate. This cap was introduced 3 years ago as a measure to prevent inflation and recession.
The 1.20 francs per euro cap allowed currency traders to take advantage of price differences knowing that SNB would continue to buy Euros to hold the value of the Swiss Franc. The surprise move to remove the cap sent the Swiss Franc soaring 30% higher against the Euro with major consequences for the foreign exchange (“forex”) market. There were several firms that suffered significant financial losses and are facing bankruptcy as a result. The export-reliant Swiss economy, which has more than 40% of its exports going to the euro zone, saw its stock prices plunge as firms across Switzerland warned of a fall in profits.
Also this month, the European Central Bank (ECB) announced a larger than expected quantitative easing (QE) package. They have committed to purchasing €60 billion ($84 billion CAD) of bonds monthly until at least September 2016. The details of the package all came as a positive surprise to investors. To limit the risk sharing between countries 80% of the purchased bonds will be owned by their respective European Central banks. The European QE is expected to result in european stock price appreciation, as a similar QE program did for the US.
Just last week, the Bank of Canada (BoC) surprised many analysts when it lowered its overnight lending rate to 0.75%. Many had expected the rate to be held at 1%, which it has been since 2010. This move is intended to provide some economic stimulus to counter slumping oil prices. This has also pushed bond prices higher and resulted in increased inflows into REITs as investors sought alternative sources of yield. The BoC rate cut has already been passed on to consumers with many Banks lowering their mortgage and prime rates.
Finally, possibly the most uneventful meeting was at the Federal Reserve, which indicated that it is staying the course and sticking to its plans to raise interest rates later this year. It noted that it expects unusually low inflation to gradually pick up as tumbling oil prices stabilize.
Over January our portfolios showed strong positive performance. Central bank action countered the falling price of oil, stock markets rallied, bond prices were pushed up and REITs appreciated.
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