By: Tim Speiss
Two themes to be considered is the credibility of continuing U.S. economic growth and the movement of long-term interest rates, and EU policies and actions to reduce sovereign and bank debt. Considering a long-term asset allocation model, investors may want to consider no significant near-term movements in the factors driving these two themes while carefully exploring economic growth prospects in Asia and pre-emerging markets.
Over the past month in the U.S., economic reports on employment, manufacturing and retail sales have bolstered confidence that there will not be a recession; today the Department of Labor announced the Jobless claims dropped by 23,000 to 381,000 in the week ended Dec. 3, the fewest since February. Also, ECB President Mario Draghi today stated there are no plans to purchase EU sovereign or bank debt; however the ECB continues to promote action to remedy on a longer term the current debt crisis. The performance of global equity indices over the past ten days has reinforced the sentiments of continuing U.S. and EU progress.
A debate presently in progress within the U.S. Federal Reserve and FOMC is the forecast of -- and conditions that would result in -- an increase in the benchmark (currently at zero percent) after 2012. In contrast, the ECB reduced its benchmark interest rate to 1 percent on December 6 in reaction to continued signs of economic weakness in the region.
As the U.S. economy strives to increase employment with modest success, the ECB continues to place pressure on European banks to raise funds and write down sovereign debt, so to comply with rules requiring higher capital ratios. The threat of Standard & Poor EU countries downgrades is a real possibility. EU banks may be forced to raise $142 billion USD by the middle of 2012 to meet guidelines from the European Banking Authority and a revised figure is scheduled to be released today, as according to Bloomberg News.
A view forward then, considering the above, is that U.S. interest rates could remain low and stable, while EU interest rates continue to fall. EU asset valuations may continue to face downward pressure as sales proceeds are utilized to reduce EU sovereign and bank debt.