Why Should U.S. Investors Care About the European Central Bank?

The policies of the Federal Reserve (Fed) have been a focal point for U.S. investors in recent years, and for good reason—central bank comments and announcements have the potential to move both stock and bond markets, for better or worse. The meetings of other major central banks, including today’s European Central Bank (ECB) meeting, are also closely watched by investors. But should U.S. investors really care about the monetary policies of overseas central banks?

Looking at the chart below, we can see that the answer is yes. Low and negative rates overseas can lead foreign investors to purchase relatively higher yielding U.S. Treasuries, and this extra demand leads to increased prices for U.S. Treasuries (and lower yields). Though the U.S. and Europe are on different economic trajectories, with the U.S. experiencing slow but steady growth and Europe working to break out of several years of very slow growth, this investor behavior has meant interest rates for the two regions have followed a very similar path in recent years. This has also meant that the impact of rate cuts and adjustments to Europe’s quantitative easing (QE) program have been felt by rate markets in the United States.

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The ECB, as expected, didn’t make any changes to monetary policy at today’s meeting. Its current bond purchase program of 80 billion euros per month is scheduled to expire in March 2017, though ECB President Mario Draghi in his press conference this morning reiterated that an extension (with a potential downward adjustment to the amount) remains a possibility. Today’s announcement was a nonevent, but the market’s focus on foreign central banks is reasonable. Weak world growth, and the low-yield environment it has created, have made rate markets more global in recent years, making it more likely that the actions of major overseas central banks may be felt here at home.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.

Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.

Quantitative Easing (QE) refers to the Federal Reserve’s (Fed) current and/or past programs whereby the Fed purchases a set amount of Treasury and/or Mortgage-Backed securities each month from banks. This inserts more money in the economy (known as easing), which is intended to encourage economic growth.

This research material has been prepared by LPL Financial LLC.

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