European QE Speculation Pushes S&P 500 to 2000

The S&P 500 hit 2,000 in intraday trading Monday morning after mixed results in Asia and a strong rise in European equity markets. Investors and traders are helping stocks rally as European Central Bank President Mario Draghi hints at a looser monetary policy in Europe aimed at targeting deflationary threats in the core of the EU.

The S&P 500 hit 2,000 in intraday trading Monday morning after mixed results in Asia and a strong rise in European equity markets. Investors and traders are helping stocks rally as European Central Bank President Mario Draghi hints at a looser monetary policy in Europe aimed at targeting deflationary threats in the core of the EU.

On August 22nd, Mario Draghi said that inflation projections had worsened significantly in recent months, which could motivate the ECB to begin an asset-purchasing program not unlike the various rounds of Quantitative Easing, or QE, that the Federal Reserve has performed since 2009 in the United States.

In recent weeks, inflation expectations for the next five years have fallen under 2% for the first time in nearly three years as yields on German bonds turned negative and yields on Italian and Spanish bonds fell below U.S. Treasury rates. The Italian 10-year yield has fallen to a record low of 2.477% and Spanish yields fell to 2.26%.

The ECB has reduced its benchmark interest rate to 0.15% while introducing a negative deposit rate in recent months. Despite both efforts, inflation has slowed in the Eurozone and economic growth has reversed in Italy, France, and Germany. German unemployment has risen, and is expected to near 12%.

Deflationary Fears

The ECB has repeatedly emphasized austerity as a cure to European weakness since 2009. However, in Jackson Hole, President Draghi said that the ECB is “ready to adjust our policy stance further” as price instability threatens a deflationary spiral in the central European nations.

While the ECB has focused on stopping inflation, which has remained far below target in recent years, GDP growth has been anemic in all parts of the European Union, leading speculation that the continent could face deflation. Analysts at Citigroup and JPMorgan said that a round of QE stimulus was likely to come to Europe in the coming year, which would signal a sharp reversal of European policy since the global financial crisis.

The ECB’s Governing Council will meet to set its monetary policy on September 4th. While some analysts do not believe the bank will begin QE that early, some expect the bank to begin plotting a program for the Eurozone at that meeting.

However, other analysts say that the EU’s tempo of asset purchasing will likely be much more modest than what happened stateside. Unlike the United States, the EU lacks a cohesive political or economic platform whereby asset purchases can be equitably distributed, leading to worries that political interests, rather than economic policy, might influence the nature of the QE program as it unfolds.

Asset Impacts

As European and American stocks rose on the news, bond rates have fallen throughout both continents. Most U.S. Treasuries fell in early morning trading, with the 10-year Treasury falling to 2.4%. German bonds also fell, with 2-year yields negative and 10-year yields falling to 0.96%. Gold has also trimmed gains it had made earlier in the year, with the U.S. spot gold price falling to 1,276.72 per ounce.

A decline in gold prices and Treasury yields indicates greater concern that deflationary pressures from the Eurozone will hinder growth more broadly. Meanwhile, tapering of the Federal Reserve’s latest round of quantitative easing has left some speculators worried that the economy has not recovered enough to spur a higher level of inflation, although the CPI has recently approached 2% rise in year-over-year prices.