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Why the Central Bank Divergence Is Set to Continue

Russ Koesterich, CFA of BlackRock

More Trouble Ahead for US Earnings?

(Continued from Prior Part)

To be clear, the recent rebound in the dollar is being driven as much by events in Frankfurt and Stockholm as by the Fed, amid a renewed divergence in global interest rates. In contrast to the Fed, which is poised to raise rates as early as December, most other central banks are racing in the opposite direction. The latest example: the Swedish Riksbank, which recently expanded its bond purchase program for the fourth time since February. While US 2-year yields are paltry at less than 1 percent, they look tantalizing relative to Europe; 2-year yields are negative in France, Germany, the Netherlands and Switzerland.

Market Realist – Central bank divergence is set to continue as European central banks expand their QE programs.

Since the European Central Bank (or ECB) signaled that it may expand the stimulus program as early as December, some policymakers outside the Eurozone have followed suit. The Swedish Riksbank’s QE (quantitative easing) program means it will have purchased 200 billion kronor ($23.3 billion) in bonds by the end of June 2016. The QE program was raised by 65 billion kronor ($7.6 billion) in the latest meeting.

Meanwhile, the Riksbank held repo rates at -0.35%, citing weakness in the global economy and the dovish nature of other central banks. Extended monetary easing in the developed world (EFA) means that the dollar’s (UUP) strength could continue.

Excessive monetary easing has led short-dated sovereign bonds in Europe to trade in negative territory. The Swiss two-year bond is yielding as low as -0.86% as of November 4. The two-year German bund is trading at -0.32%, and the Dutch and the French 2twoyears are yielding -0.30 and -0.26, respectively.

Meanwhile, the Japanese two-year is yielding just above the negative zone, at 0.01%. Comparatively, the two-year US Treasury bills (NEAR) (SHY) is yielding much higher, at 0.8%. Current yields of US Treasuries (GOVT) are considered safe when compared to European and Japanese bonds. This could add to the dollar’s strength.

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