What's in the box? Unpacking the ECB's new stimulus package.
On the latest edition of Market Week in Review, Senior Investment Strategist Paul Eitelman and Head of AIS Business Solutions Sophie Antal Gilbert discussed the European Central Bank (ECB)’s new stimulus package, positive developments in the China-U.S. trade war and the recent rise in value stocks.
Draghi announces sweeping stimulus package
Outgoing ECB President Mario Draghi unveiled a sweeping monetary stimulus package on Sept. 12, Eitelman said, headlined by the revival of the central bank’s asset purchase program, otherwise known as quantitative easing (QE). Beginning in November, the ECB will buy €20 billion a month in government debt until the central bank feels more confident about its inflation objectives, he explained. This part of the stimulus package was a positive surprise for markets, Eitelman noted.
In addition, the ECB cut its key interest rate from -40 basis points to -50 basis points and boosted bank lending conditions, he said. “Rates are now very, very low and the ECB now has an extremely accommodative monetary policy,” Eitelman remarked. The stimulus package marked a positive step in the central bank’s attempts to push back against increasing downside risks, such as trade tensions and a slowdown in the manufacturing sector, he said.
Responding to an inquiry from Gilbert about how this may impact the U.S. Federal Reserve (the Fed)’s thinking, Eitelman noted that the Fed’s calculus is similar in many ways to the ECB’s, although not quite as severe in terms of the policy response needed. Facing a similar dilemma of weak inflation and trade-war woes, the Fed will likely cut rates again on Sept. 18, he said. While the idea of negative interest rates in the U.S. made headlines the week of Sept. 9, the country is likely a long way from needing such a policy, Eitelman stated, as the health of the U.S. consumer remains strong.
Trade tensions ease, but remain elevated
The past two weeks have brought, incrementally, more and more good news around the China-U.S. trade war, Eitelman said. The latest round of positive developments occurred Sept. 12-13, when the U.S. announced that it would delay an increase in tariffs on roughly $250 billion worth of Chinese imports from Oct. 1 to Oct. 15. “This opened the door for a positive reaction from China, which responded by exempting U.S. soybeans, pork and other agricultural goods from additional tariffs,” he said.
Eitelman noted that there appears to be increasing market anticipation that the tariffs threatened by the U.S. against additional Chinese imports—scheduled to take effect in mid-October and mid-December—could be taken off the table. “At the margins, the boil seems to be coming off a little bit on the trade tone between the two countries,” he stated, cautioning that tensions still remain elevated, especially in comparison to a few months ago.
Value stocks rally
The week of Sept. 9 was positive for equity markets across the board, Eitelman said, and particularly for value stocks. “Companies with lower valuations significantly outperformed the broader market this week,” he stated, “especially in comparison to growth and defensive stocks, which have dominated market performance over the past few years.”
Eitelman explained that in a historical context, the value component of the market is nearly as cheap today as it was back in the tech-bubble era of the late 1990s. “I believe there’s a big opportunity in value stocks for potential outperformance if certain things go right,” he said, emphasizing that there’s been a fair amount of risk aversion embedded in pricing due to the ongoing trade uncertainty.