You can only stand and applaud Mario Draghi, the amazingly skilful president of the European Central Bank. This man has demonstrated that, contrary to a popular saying, words speak louder than actions.
Low interest rates are good for shares. So is inflation, which QE encourages
Draghi has talked the talk as far as the Eurozone is concerned for so long that he has finally bored the main protagonists into agreeing to a spectacular bout of quantitative easing. Not only that, he has played the drama to maximum effect like a magician, letting the world think that he would produce €500 billion out of the hat, then raising hopes to €1 trillion and finally pulling €1.14 trillion out of nowhere. What a showman!
The question is, will it do any good? It certainly pleased the stock markets, which had already been ahead strongly in the early part of this week and surged further when the amount of quantitative easing surpassed expectations. The euro, which had hitherto defied the obvious shortcomings in the single market, tumbled against the dollar and the pound and interest rates in and outside the Eurozone fell further.
Low interest rates are good for shares. So is inflation, which QE supposedly encourages. No wonder shares rose on the London Stock Exchange. Theoretically we are not supposed to get both at the same time.
Caution is required, though. While it is reasonable to argue that QE rescued the US and UK from financial crisis, there is no evidence that it will deal with Europe’s stagnation. Indeed, the experience of Japan suggests it won’t. As crucial elections loom in Greece, we could all be running for cover next week.
The FTSE 100 has crossed above 6,800 points, a timely hint to those who seem to have got the impression that the index has been falling. It is in fact still going erratically sideways and is currently in danger of breaking the ceiling, not the floor. The Footsie has baulked at this level several times over the past two years and is likely to do so again.
New Saudi King and the Oil Price
What now for oil following the death of Saudi Arabia’s King Abdullah? The immediate reaction of the markets was for oil to rise by $1 a barrel. I’m more cautious.
Abdullah was seen as a keen proponent of letting the oil price fall rather than cut back on production in order to teach American shale produces and Russia a lesson.
Now Abdullah has gone, his replacement King Salman may choose a softer line on oil prices. The fact that a Saudi oil minister hinted some weeks ago that oil would bottom at $60 indicates that there are some powerful people in the country who think the price slump has gone too far.
However, Abdullah has been ill for several weeks and there was ample opportunity to countermand his wishes. I think, therefore, that cheap oil will be with us for the rest of this year at least but perhaps we have now seen the bottom of the market.
Will BHP Bounce Back Come Too Late?
Among resources companies that had suffered of late is BHP Billiton (BLT), where shares were down from £20 in August to just under £14 ahead of this week’s trading update. They picked up on the actual update, though I can’t see why. BHP is caught in the worst of all worlds.
It has stepped up production pretty much across the board. That at least brings in extra revenue to compensate for falling commodity prices but it does mean that the group is helping to push prices even lower.
BHP is understandably conserving cash by cutting back on capital spending but that may mean it is less able to cash in when the inevitable bounce back comes. Even so, debt is rising and eventually the dividend will come under threat.
I can’t see any case for buying the shares even at lower levels. You may be in for a long wait.
Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice. His views are not the views of Morningstar UK.
