We took a break last week for the final push through tax season, but we are back with our weekly commentary.
Last Wednesday, Mario Draghi, President of the European Central Bank (ECB), managed to sound increasingly bullish about Europe's improving economic outlook at his regular press conference. At the same time, he shot down recent rumors of an early exit from the quantitative easing (QE) program which the ECB launched in March. The speculation of an early end to the asset-purchase scheme has focused not only on a very weak euro currency, potentially creating an inflation overshoot, but just as importantly on concerns that the ECB will struggle to find enough eligible debt to complete the program.
Volatility returned to markets in a big way on Friday, as China's securities regulators announced new policies to allow the short-selling of stocks and to restrict the use of margin trading accounts. Fears that the odds of Greece exiting the Eurozone are rapidly increasing also contributed to Friday's swoon, which sent the major U.S. indices down more than 1% for the week.
For the week, the S&P 500 dropped -0.99%, the Dow Jones Industrial Average fell -1.28%, and the MSCI EAFE (developed international) decreased -0.22%.
Here are the 3 stories this week that rose above the noise:
Few Who Lost Homes in U.S. Will Make Purchases Again Soon
One potential tailwind for housing is the influx of former homeowners who previously lost their homes to foreclosure or distressed sales during the housing crash. A whopping total of 9.3 million homeowners either foreclosed or were forced to sell their homes at a loss since early 2007. Unfortunately, only 950,000 have bought again and only 1.5 million are likely to purchase a home in the next five years.
Tighter credit standards and affordability are the biggest impediments for this group to return to the housing market. The U.S. homeownership rate dropped to a two-decade low at the end of 2014 and is likely to remain low for the foreseeable future, according to the National Association of Realtors.
The Fed Still Wants Easy Money
While investors have been focused on the potential timing of the Fed’s first interest-rate hike, recent commentary by Fed officials suggests rate hikes are likely to be extremely gradual once the tightening cycle begins. A recent Bloomberg article summarizes some of the recent speeches by Fed Chair Yellen and her colleagues that have indicated a desire to keep monetary conditions very accommodative for the foreseeable future. As a result, the path of coming rate hikes could be among the most gradual in the Fed’s history, which may help to limit market volatility once the initial hike is done.
What U.S. Interest Rate Hikes Will Mean for China's Economy
With the Chinese equity markets among the top performers this year, is this market at high risk if and when the U.S. Federal Reserve raises interest rates as expected later this year? While an initial rate hike will likely bring uncertainty, many economists feel that China is well positioned to avert significant negative impact from a U.S. rate hike.
For one, the People's Bank of China has many dovish policy tools at its disposal – they could cut interest rates domestically and/or continue easing up banking regulations, similar to their recent bank reserve requirement reduction. China is also likely to staunchly guard against any depreciation in its currency (the Chinese yuan). However, economists hedge these arguments if the U.S. Fed embarks on an aggressive, rather than measured, pace of tightening.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
