The European Central Bank announced on January 22, 2015 that they would begin buying bonds worth 60 millions euros ($69.7 billion) a month. The quantitative easing bond buying program will last from March 2015 until September of next year. The ECB should end up purchasing over 1.1 trillion euros in assets.
The announcement comes as a result of the Eurozone being in deflation territory. In December inflation of the 19 member Eurozone fell into the negative territory. If prices continue to decline there could be crucial consequences for the economy. By increasing the money supply there should be an upsurge of investment and spending in the economy, creating employment opportunities and helping economic growth.
Adding extra precariousness to the stock market is Greece. Recently, Alex Tsipras of the anti- austerity Syriza won Greece’s general election. The Syriza party promises to reverse numerous austerity measures including budget cuts and tax increases demanded in return for the 249 billion dollar Euro bailout Greece received in 2010. Greece may try to negotiate the terms or refuse to repay the debt owed to the tax payers of the Eurozone which is causing uncertainty.
Several multinational companies who sell their products overseas are reporting slower sales because US products are now more expensive. As an example, 5 months ago a product selling for 1,000 US Dollars would have cost a European 745 Euros. Today that same item would cost them 900 Euros which is a 21% increase in the matter of 5 months.
Although, there is a benefit for the lower oil prices there is also a large negative side. While consumer confidence was reported at 102.9, the highest number in about eight years, durable goods were down 3.4%. Adding to this were poor earnings reports by many of the market’s larger corporations. They all have blamed the stronger dollar as well as the negative aspects of lower oil prices for their earnings misses.
Oil prices have continued their downstream as the new Saudi King said he will continue current policies and may even increase the production of oil. When future oil prices, or forward prices, are higher than current prices, this is called Contango. Many may think this means the prices of oil will go up in the future but it actually means the exact opposite.
A major factor of future prices is the storage cost of oil. When costs at a storage facility are high and it costs more to store oil in the months ahead, that means there is extra supply and nowhere to store it. When supply is so high the cost of oil should come down. Inversely, when costs at storage facilities are low, that means there is a shortage of supply and you can store your oil at bargain prices. If this happens you will see future oil prices lower than current prices. When supply is low, that generally means the price of oil will be higher. The market is currently in Contango. When we see range of future oil prices expand, it means that we could start to see the price of oil get cheaper.
In housing news, the Case Shiller Home Price Index for November was reported to have met expectations. The 20-city index was down 0.2% but after seasonal adjustments was actually up 0.7%. On a year over year basis the index is up 4.3%,
New home sales for December were reported up 11.6% at a 481k unit pace. This measures signed contracts so it’s forward looking, but it was much stronger than expectations looking for a 452k unit pace. Last month’s figure was revised slightly lower from 438k to 431k. Median Home Prices were reported at $298,100, up 8.2% from last year. These were stronger numbers showing appreciation.
The Fed released their statement saying that the rate of inflation has declined. They anticipate an even further decline over the short term. The Fed also noted that International Developments will be a factor in deciding the first rate hike, as dollar strength and the reemerging uncertainty in Greece are taken into greater consideration. In the past many had not believed that the Fed will not hike at all in 2015 but are now coming around to this way of thinking.
