A lot has happened these past few weeks and the market has been reacting in spurts of various all-time lows and relieved rallies. Here is a quick recap:
Oil dips- Since mid-2014, watching the price of Brent crude has been like watching a falling knife. From US$115 a barrel in June, to $80, then $60, then it dipped below $50 on January 12th and a grimacing $45.79 as of mid-day today. While it’s fundamentally and unsustainably low at these levels, I'd stick with the idea that oil will not bounce back quickly – but it will come back. $40 to $50 is likely too low in the long run as 1) marginal cost of supply is above this even if we are wrong about how far technology has advanced; 2) low prices will stimulate demand; 3) low prices will hurt supply…but if you’re hoping for a quick 2015 rebound, don’t hold your breath.
BOC Surprise! The Bank of Canada (BoC) surprised all of us and unexpectedly lowered its overnight rate target by 25 basis points (bps) to 0.75% on Wednesday this week (the first policy adjustment since September 2010), in response to the challenges that lower oil prices pose for near-term growth and inflation in Canada. “This decision is in response to the recent sharp drop in oil prices, which will be negative for growth and underlying inflation in Canada" read the statement. BoC Governor Stephen Poloz characterized the rate cut as “insurance” for the economy given how the slide in oil prices is likely to affect investment in energy-related sectors of the economy and also push inflation even further below a level the central bank is comfortable with.
Economic Growth - The central bank also said economic growth in Canada is expected to "average 2.1 per cent in 2015 and 2.4 per cent in 2016, with a return to full capacity around the end of 2016."
Loonie loser – after the announcement on Wednesday, the Canadian dollar finished the trading day at 81.07 US cents, down 1.53 cents from Tuesday's close, to a near six-year low….80.57 today.
QE jolt! - The European Central Bank (ECB) finally showed its hand, and unveiled the details of its quantitative easing (QE) programme on Thursday. The consensus view was that ECB President Mario Draghi would disappoint - when he didn’t, most equity markets rose and the euro fell against the dollar, yen, and sterling. The threat of deflation, lackluster growth, and limited success of previous measures spurred the ECB into bold action. In essence, each month the ECB intends to buy assets worth €60B, including government and supranational bonds. Starting in March 2015 and lasting for 18 months, the programme remains open beyond that until inflation moves closer to the ECB’s 2% target.
Shiny gold - the rally in gold persisted, but with less vigor than previous weeks. It has quietly climbed 9.3% year to date and has risen 13.5% from the cycle low reached in early November. Gold’s run has been spurred along by the Swiss National Bank’s unexpected removal of its currency cap against the euro and the anticipation of ECB QE.