The ECB Has Spent $2.6 Trillion of Your Money

29.06.2017 • Switzerland

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Henry Bonner – Strategy and Council Letter (Switzerland) –

Back in Switzerland … We find the office … and a lifestyle.

We have been traveling since the end of May …

What interests us today?

After a rebound yesterday, the stock market is again in retreat this morning …

Yesterday, the Wall Street market climbed … led upward by the shares of banks, which received permission from the Fed to increase their dividends …

Today, the stock market is already giving up its gains … the CAC 40 is down since its opening … losing 0.68% in less than 3 hours.

According to Bloomberg, the market became frightened after the speech of Mario Draghi, the ECB leader, on Tuesday …

Draghi seems to have convinced the market that its stimulus program – its bonds repurchases at the rate of 60 billion euros per month – will finally come to term …

As a reminder, the ECB has begun to buy back the bonds of governments in the euro zone, plus corporate bonds, in order to give a “boost” to the economy …

After about € 2,300 billion in purchases since the inception of this program, the ECB has managed to reduce interest rates to the lowest levels we have seen …

Where did all the money come from?

In large part, investors on the stock exchange have benefited …

Wall Street has climbed 79% in 5 years … the CAC 40 took 64% …

Now the market is worried about what could happen if the ECB slows down its program … and the last comments of Mario Draghi have not reassured them …

Martin Whetton, an analyst at ANZ quoted by Reuters, summarizes the consensus on the market:

“When central banks begin to reduce their programs, and when they reduce the size of their assets, then we can confidently say that the markets will face a much more difficult environment than they have experienced for a long time . ”

At present, the market is trading shares of some companies with valuations that exceed all records … more than $ 760 billion for Apple … and $ 650 billion for Alphabet, Google’s parent company …

Sooner or later, the market must change direction …

Pay attention.

Meanwhile, the government is sinking even deeper into debt …

 

Point:

“The 2017 deficit should be valued at 3.2% of GDP against an initial target of 2.8%, according to information from the Canard enchaîné and Les Echos. That is a slippage of more than 8 billion euros. ”

As we often recall, the deficit does not “count” at this time …

Why?

Well, our leaders at the ECB have cut interest rates so much that our government spends almost nothing to pay them back …

When the debts reach maturity, they issue a new obligation to cover the repayment …

As a result, as long as rates remain at current levels, the government can afford to spend larg …

However, sooner or later, the market changes …

As interest rates rise, our interest expense will also climb …

Instead of spending 10% of its budget to pay interest on debt, as it does at the moment, the government will have to put 20% … then 50% … then the entire budget to pay its debt … while Trying at all costs to reduce what he owes before it is too late …

We thought we were on the way to this kind of scenario in late 2016 …

In the space of 6 months, our rates had risen from 0.1% to 1% on some of our debts …

Since then, the market has come to rescue us … these same rates have come down, arriving at less than 0.6% in late June …

Today, these rates have jumped to 0.7% after Draghi’s speech … but these rates remain for the moment at the bottom of their range …

What happens next?

 

As we have explained in previous messages, we are in a period of “calm” …

We will have more news on the health of companies at the end of the second quarter … tomorrow!

However, we will have to wait a few weeks for them to publish their results …

What should be monitored in these results?

Well, the market we have today is looking for signs of growth … especially in the IT sector …

We announced earlier that worse than expected results could destabilize this market …

Since the beginning of May, the CAC 40 has been slowing down, having lost 3.4% over this period …

Without news to comfort her, we should expect a summer marked by a decline in actions …

To be continued…

-Read more at www.lettre-strategie-conseil.com (French)-

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