S&P futures were up +0.5% earlier this morning on rumors of 500-billion-euro ECB QE program based on paid-in-capital of member central banks. This report does not sound bullish to me. QE in the US only worked when it was left open ended, meaning there might be no end to bond buying, weakening the currency and stimulating the economy with more competitive unit labor costs. The ECB's rumored plan is based on the percentage contribution from each central bank. For example, Germany, the largest member, pays in 17.9% of the ECB's capital, so the ECB would allocation 17.9% of it's purchases to German sovereign debt. But Germany does not have a fiscal or funding issue. The program should target countries which need the funding rather than being based on the percentage of paid-in-capital.
The S&P futures have subsequently backed off the the unchanged level, probably due to a realization of the shortcomings of such a QE plan and also because WTI is down over -3.0%. The ECB has a habit if underwhelming relative to expectations. I don't see this tendency changing with this QE announcement.
Friday's selloff was a very disappointing reaction to Friday's NFP report which I took as quite bullish for equities. I think the weakness on Friday was more related to continued weakness in the energy sector rather than income disparity. Stocks should like lower hourly earnings, because this indicates further margin expansion. The popular press's explanation that the stock market went down on income inequality is laughable to me. Since when do stocks care about the average American's income? I do agree that a long-term sustainable economic expansion must include increases in wages, but in the short term, this report could mean the earnings season will surprise to the upside. If this market turns lower today, I would not be encouraged to buy anything. if the the S&P is able to eek out a rally today, then it would have to push up past 2064, Friday's opening high, for me to become more positive.
Until the ECB surprises with a program that raises your eyebrows, don't buy into an ECB QE rally. Oil will remain the key to the market direction. This was the driver of the weakness on Friday, and it will remain the early indicator of market direction.
Michael Grove, CFA