Thursday, June 5, 2014

Markets crawl higher after ECB rate cuts

Dow inched up 14, advancers were a little ahead of decliners & NAZ rose 4.  The MLP index was off 1+, from its record high, to the 498s & the REIT index did little in the 301s.  Junk bond funds edged higher & Treasuries were even.  Oil fell after the ECB cut its deposit rate below zero, increasing concern that economic growth is stalling.  Gold rallied on the same news.

AMJ (Alerian MLP Index tracking fund)

CLN14.NYM....Crude Oil Jul 14...101.73 Down ...0.91  (0.9%)

GCM14.CMX...Gold Jun 14......1,252.60 Up ...8.60 (0.7%)

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Draghi Unveils Historic Measures to Counter Deflation Threat
Photo:   Bloomberg

Mario Draghi unveiled an unprecedented round of measures to help the ECB’s record-low interest rates feed thru to an economy threatened by deflation.  The ECB cut its deposit rate to minus 0.1% &, becoming the first major central bank to take one of its main rates negative.  To get credit flowing to parts of the economy that need it, the ECB also opened a €400B ($542B) liquidity channel tied to bank lending & officials will start work on an asset-purchase plan.  While conceding that rates are at the lower bound “for all practical purposes,” he signaled the the ECB is willing to act again.  “We think it’s a significant package,” Draghi said.  “Are we finished? The answer is no.”  A worsening in the economic outlook & prolonged slow inflation has prompted the ECB to act to preserve the fragile recovery in the world’s 2nd-largest economy.  “We decided on a combination of measures to provide additional monetary policy accommodation and to support lending,” Draghi added.  The benchmark refinancing rate was cut 10 basis points to 0.15% & the marginal rate was reduced by 35 basis points to 0.4%.  Draghi also announced a new liquidity program designed to encourage lending.  Financial institutions will be allowed to borrow money from the ECB to an amount worth 7% of their outstanding loans to non-financial corps & households, excluding mortgages.  The maturity will be up to 4 years, at a rate set at the ECB’s benchmark rate, with an additional 0.1% on top of that.  Banks that don’t pass the money on will be forced to repay it after 2 years.

Draghi Unveils Historic Measures on Deflation Threat

Fewer Americans filed applications for unemployment benefits over the past month than at any time in 7 years, a sign the labor market continues to strengthen.  The 4-week average for jobless claims fell to 310K in the last week, the lowest since Jun 2007, according to the Labor Dept.  But the number of applications last week climbed to 312K from 304K, in line with the forecast.  A drop in dismissals over time may be a sign that companies, lean from prior job cutting, are preparing for improving demand.  Now, sustained hiring gains are needed to push up wages & spur better consumer spending.  The number continuing to receive jobless benefits dropped by 20K to 2.6M, the fewest since Oct 2007, & the unemployment rate among people eligible for benefits held at 2%. 

Fewest Americans Filed Jobless Claims Over Past Month Since 2007

General Motors CEO Mary Barra told employees that the automaker has removed 15 employees after an investigation into a fatal flaw found incompetence & neglect.  “This should have never happened. It is simply unacceptable,” Barra told 1K employees.  “From start to finish, the Cobalt saga was riddled with tragedy,” she said.  The investigation confirmed Barra’s previous claims that she was previously unaware of the flawed switch.  The report marks a pivotal moment in Barra’s efforts to change the automaker’s culture after the biggest legal & public-relations challenge since its gov-backed bankruptcy in 2009.  Barra has attempted to persuade Congress & customers that the safety woes reflect the "old GM" not the financially healthy.  The probe, headed up by lawyer Anton Valukas is based in part on 1M documents also released to Congress.  The trove of material shows the automaker was hobbled by engineers who failed to detect a flawed ignition switch & a dysfunctional review system that delayed a recall for 10 years.  The stock slipped pocket change.  If you would like to learn more about GM,
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GM’s Barra Says 15 Were Fired Following Valukas Report on Fatal Auto Flaw

General Motors (GM)

The stock market did not give a ringing endorsement to the changes by the ECB.  The ECB is trying to give a boost to economic growth but this is new territory & nobody is really sure what to make of it. The cautious response by the US stock market is a big surprise to me.  I assumed throwing more money at problems would bring out stock buyers in droves. Perhaps they've finally learned a few lessons after the financial debacle 6 years ago..

Dow Jones Industrials

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