Weekly Market Commentary 2/23/15

Posted on : Feb 23, 2015

 

The Markets

It was all Greek to investors.

Last Thursday, things weren’t looking so good for Greece. Barron’s explained:

“…Germany scotched Greece’s request for a six-month extension to its existing aid package. Athens had sought more time to renegotiate the Draconian austerity package imposed on the land of Pericles, to keep from going bust and, perhaps, being kicked out of the euro zone.”

Just a day later, though, Eurozone leaders found grounds for compromise and Greece became the beneficiary of a four-month extension to its current aid package. The deal was contingent on Greece coming up with a list of economic reforms by this Monday for European leaders to approve.

The Irish Times reported Greek Prime Minister Tsipras gave the conditional agreement an interesting spin, telling Greek citizens, “Yesterday’s agreement with the Eurogroup… cancels the commitments of the previous government for cuts to wages and pensions, for firings in the public sector, for VAT rises on food, medicine.” After all, that’s what he promised during his campaign.

World markets were unconditionally thrilled with the news. In the United States, the Dow Jones Industrial Average and Standard & Poor’s 500 Index both closed at record highs. Markets across Europe and Asia finished the week higher. The only stock markets reported in Barron’s International Perspective that didn’t finish the week higher were in Taiwan and Canada.

Closer to home, The Federal Reserve’s Open Market Committee minutes indicated to some rate hikes may not begin in June, as had been expected. However, Reuters pointed out employment data has been very strong since the January 28 meeting and could affect the Fed’s decision about when to tighten.

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And Now, For Something Completely Different

You learned about negative numbers in school. Now, you get to learn about negative interest rates. Currently, the European Central Bank (ECB) pays -0.2 percent on money banks have deposited. By way of comparison, the U.S. Federal Reserve’s Fed funds rate is 0.12 percent.

The idea of negative interest rates – essentially, paying a company or institution to hold and use your money – is confounding. Why wouldn’t you opt for cash instead? Richard Anderson and Yang Liu of the St. Louis Fed explained:

“Negative interest rates fascinate both professional economists and the public. Conventional wisdom is that interest rates earned on investments are never less than zero because investors could alternatively hold currency. Yet currency is not costless to hold: It is subject to theft and physical destruction, is expensive to safeguard in large amounts, is difficult to use for large and remote transactions, and, in large quantities, may be monitored by governments. Currency does not provide even a logical zero floor for market interest rates.”

According to The Economist, banks in the United States and Europe have very significant amounts of cash tucked away with their central banks, thanks to quantitative easing. By paying a negative rate of return, the central banks are encouraging member banks to reduce reserves by lending. The idea is to stimulate economic growth. The catch is borrowers may be in short supply when economic prospects for new businesses are murky.

One unexpected consequence of negative interest rates is some financial firms’ computer systems have had to be reprogrammed because they weren’t set up for negative rates.

Weekly Focus – Think About It

“Do you want to know who you are? Don’t ask. Act! Action will delineate and define you.”
–Thomas Jefferson, Third U.S. President

Best regards,

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