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Chart of the Week

February 15, 2016

Europe stocks: Enough negativity
ECB Effective Deposit Facility and M1 Money Supply

chart

Source: Bloomberg, as of 1/29/2016. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

The bottom Line:

  • The European Central Bank (ECB) recently pushed short-term interest rates deeper into negative territory—hoping to provide additional stimulus to the economy.
  • The ECB's target interest is now -0.3%, down from -0.2% in November 2015 and 0% in May 2014.
  • Have negative rates helped Europe's economy?
  • On the one hand, the M1 money supply has seen double-digit year-over-year growth for almost a year now. That suggests some of this stimulus could translate into more consumption and investment.
  • Consumer confidence had risen—the Dec. 2015 reading was the highest since 2007—and demand for real estate and automobiles has also ticked higher.
  • Unfortunately, negative rates have some negative implications for European banks and their stock prices.
  • In effect, the banks are being charged for holding short-term deposits, while earning less interest income from new loans.
  • That squeezes margins at a time when some fear that collapsed oil and commodity prices could expose banks to losses.
  • Such concerns would explain the 27% drop in MSCI Europe Bank Index in just 29 trading days this year1, along with declines in the region's consumer confidence, investor sentiment and German business confidence.
  • They also beg the question of whether easy money could be losing its ability to stabilize financial markets.
  • Time will tell, but for now the contest seems to be between the real economy and market sentiment. If economic growth picks up further—buoying confidence in the financial sector before negative sentiment can undermine real economic activity—then today's asset prices could prove to quite appealing after the dust settles.

The chart:

  • The chart shows the ECB Effective Deposit Facility (the bank's target interest rate) and M1 Money Supply growth in year over year percentage terms over the last three years.
  • Note that M1 growth began accelerating when the target rate went negative.

1Source: Bloomberg, as of 2/11/2016.


Definitions:

The European Central Bank (ECB) is responsible for the monetary system of the European Union (EU) and the euro currency.

The Effective Deposit Facility is a target interest rate set by the ECB in its efforts to influence short-term interest rates as part of its monetary policy strategy.

The MSCI Europe Banks Index is the bank component of the MSCI Europe Index, which is a free float-adjusted market capitalization index that is designed to measure developed market equity performance in Europe: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.


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Will China's official growth rate fall to 6 percent by the end of 2015?

Yes: Economic reform measures will take their toll on growth
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