Friends in Low Places

by Ralph Cole, CFA Executive Vice President of Research

In a much anticipated move, the ECB joined the rest of the developed world by announcing a comprehensive quantitative easing package this week. Investors were worried that maybe the plan would not be big enough or long enough to satisfy global capital markets. Bond yields and equity indices gyrated as the official announcement was released but eventually stocks moved higher and European bond yields moved lower. Yields on 10-year bonds around the world remain shockingly low, and it appears they may remain low for some time. Here is a list of global 10-year yields:

U.S. 1.88%
UK 1.51%
Canada 1.42%
France 0.61%
Germany 0.38%
Italy 1.54%
Spain 1.41%
Switzerland -0.20%

Source: Factset

The goal of quantitative easing is to lower longer-term borrowing costs in an attempt to incentivize businesses and individuals to borrow money and invest. Some of the excess liquidity in the system can also flow to equity markets, and drive prices higher. This acts to boost confidence and hopefully trigger investment and spending. This recipe worked well in the U.S. during QE3, and Europe is hoping to follow the same path.

Golden Years

Golden months may be a better term. Somewhat under the radar, gold has turned up in a strong performance in the last three months. It appears that a race to the bottom in currencies is finally starting to resonate with global investors. Gold is up 15 percent from recent lows to nearly $1,300 per ounce. Gold is viewed as a hard currency that can't be debased like fiat currencies. When we held gold in client portfolios several years ago it was for this very reason.

Takeaways for the week

  • Despite a well telegraphed move, the QE announcement by Mario Draghi was celebrated by markets around the world
  • Many developed economies are attempting to deflate their currencies in an effort to boost growth. This has led some investors to purchase gold as a store of value