Market bets are rising this week that Europe could embark on a major bond-buying program with potential implications for U.S. stocks.
Gold rose this week to a 3-and-a-half month high, oil moved higher and the dollar hit a seven-week low, all on speculation that the European Central Bank is prepared to repeatedly buy Italian and Spanish to cap their yields, if necessary.
The speculation first began over the weekend when Germany's Der Spiegel magazine reported that the ECB would target specific yield levels as part of a bond-buying program. Then a story appeared in the British newspaper The Daily Telegraph; its writers said they could confirm that a similar program is planned.
It remains to be seen if such a strategy will be enacted, and how effective it might be.
Yet the speculation alone perhaps provides important cues as to how any European stimulus could affect the U.S. stock market.
Here’s what could happen:
- Initially on the news, the S&P 500 briefly rose to a four-year high. Stocks rallied globally, in fact, with European and Asian markets also posting gains. A large, well executed ECB bond-buying program could help support global risk-taking, and be an overall positive influence for global equity markets. It may help turn investors’ thinking more toward inflationary risks, instead of deflationary risks.
- Having both Spain and Italy significantly backed by the ECB could increase risk-taking in both countries’ investments, and perhaps for much of the euro zone. That could lead to outperformance of those countries’ stocks relative to those in the U.S.
- The currency market’s flight to quality to the U.S. dollar could ease. As a result, many of the U.S. based multinational companies hard hit by currency effects from their European operations in the second quarter could see stronger earnings from their European divisions, providing a boost to overall EPS.
Flight-to-safety stock plays -- high-dividend-paying utility stocks and others -- could begin to underperform if global cyclical stocks begin to rally broadly.
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