Last week, the European Central Bank (ECB) increased monetary stimulus. The continued stimulus was widely expected, but the amount exceeded expectations. The most recent stimulus involved four components.
- The main refinancing rate was reduced by five basis points (bps) to 0% and its marginal lending rate to 0.25%.
- The deposit rate was reduced from negative 0.30% to negative 0.40%.
- Monthly asset purchases will increase by 20 Billion euros to 60 billion euros. The total program is now 1.7 billion and includes investment-grade non-financial corporates.
- Additional special loans with a four year maturity to spur bank lending were offered with a rate of 0% to negative 0.40%.
The additional stimulus came with guidance that the ECB expects low inflation for a prolonged period of time.
The Fed meets this week, and I don't expect them to increase interest rates until June at the earliest. I do anticipate they will cite improving economic conditions, with inflation still remaining below the 2% target.
Risk markets have performed extremely well over the last three weeks. Equity markets, high yield bonds and energy prices have risen substantially in price. I expect this rally will slow as valuations have adjusted very quickly, approaching fair value and key technical resistance levels.
This blog post is for informational use only. The views expressed are those of the author, Dave O’Malley, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Any statements about financial and company performance of The Penn Mutual Life Insurance Company or its insurance subsidiaries (each, “Client”) made by the author is provided with a written consent from the Client. Penn Mutual Asset Management is a wholly owned subsidiary of The Penn Mutual Life Insurance Company.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
High-Yield bonds are subject to greater fluctuations in value and risk of loss of income and principal. Investing in higher yielding, lower rated corporate bonds have a greater risk of price fluctuations and loss of principal and income than U.S. Treasury bonds and bills. Government securities offer a higher degree of safety and are guaranteed as to the timely payment of principal and interest if held to maturity.
All trademarks are the property of their respective owners. This material may not be reproduced in whole or in part in any form, or referred to in any other publication, without express written permission.