Global Rate Cuts Fall On Deaf Ears—For Now

July 05, 2012

Central bank rate cuts popped like Fourth of July fireworks around the world, but few seem to have noticed.

(Updated to add information on below-expectations U.S. June jobs report.)

The ETF market pretty much looked past a series of simultaneous central bank actions aimed at stoking economic growth, but that doesn’t mean asset prices won’t move more dramatically once traders fully wake up to the new variables coursing through markets after the holiday lull runs its course.

Thursday began with central banks around the world either cutting official borrowing rates or, as the Bank of England did, earmarking fresh funds to expand quantitative easing. So-called QE is the purchasing of bonds aimed at keeping yields on benchmark government debt low to encourage borrowing that, in turn, can help spur economic growth.

The policy moves, which included 25 basis point cuts in official borrowing rates in China, in the eurozone and even in non-EU Denmark, haven’t for the most part yet produced the results that many might have expected.

“China was kind of a shocker, but the ECB move was more symbolic,” said Tyler Mordy, a financial advisor with Canada-based HAHN Investment Stewards & Co.

Mordy surmised Chinese officials may have had a glimpse at June economic data and decided that time was of the essence to pump enough liquidity into the world’s second-largest economy to keep its growth from slowing too much and further damaging the global economic outlook.

Mordy added that he wouldn’t be surprised to see Chinese asset prices perk up, but sees a game of diminishing returns as central banks in the developing world look to spur economic growth using QE.

As an example, he said the first time the Federal Reserve in the U.S. instituted QE after the market collapse of 2008, broad stock indexes rose almost 37 percent; QE2 resulted in a stock market rise of around 24 percent;  and “Operation Twist”—its third QE initiative, was followed by a stock market rise in the low teens.

But, as things stood on Thursday, the day ended with the iShares FTSE China 25 Index Fund (NYSEArca: FXI)—an ETF proxy for China’s equity market—down 11 cents, or about a third of a percent, at $34.09 a share.

The SPDR S&P 500 ETF (NYSEArca: SPY) meanwhile fell 63 cents, or 0.46 percent, to end the day at $136.84, according to data published on Google Finance.

The Dow Jones industrial average fell on Thursday as well and, on Friday, after release of the U.S. government's monthly snapshot on the job market, the stock index was down almost 1.5 percent. The U.S. economy created 80,000 jobs in June, which was short of expectations.

Holiday Lull

The different policy initiatives came a day after the U.S. Independence Day holiday, and trading volumes were rather low, dampening any upside movement in equities that might come with such action, according to Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial.

Moreover, financial markets were waiting for tomorrow’s June report on the U.S. job market, Weisbruch added.

Economists expected the report to show that the U.S. economy added about 95,000 jobs in June. As noted, the report found that 80,000 jobs were created last month, though the May number was revised upward to 77,000 jobs from 69,000 in the initial report a month ago.


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