ECB Negative Interest Rate Creates Uncertainty

The European Central Bank’s plan to slash its interest rate on deposits into negative territory has caught the attention of U.S. advisors, but whether the move results in major portfolio changes is still up in the air.

The ECB's monetary policy change that takes effect June 11 means that commercial banking institutions in Europe will now be charged for holding deposits with the central bank. The move was aimed at boosting low inflation, by encouraging increased lending.

Matthias Kuhlmey, HighTower's head of group investment solutions, says the ECB's action indicates troubling economic conditions in Europe. However, there are still opportunities for advisors to explore equities in "high quality multi-national firms." Kuhlmey, who is German, sees potential in European stocks from investors wanting higher yields. But he also is concerned by the ECB’s efforts to fix the region's fiscal woes.

"The concern that every financial advisor needs to have is that there is still a need for central banks to stimulate the economic framework," says Kuhlmey, who prior to joining HighTower held positions at UBS, Bank Julius Baer and Deutsche Bank. "If you have a focus toward central banks trying to fix inflation, a financial system will inherently become more risky."

NOT A "GAME CHANGER"

Similarly, Willie Delwiche, investment strategist at Robert W. Baird & Co., says European stocks are inviting, given that banks increase lending. But "cash being less attractive" is also a concern for Delwiche. He doesn’t expect advisors to make any drastic decisions related to the region, until the ECB program has time to settle in.

"It's a step in the right direction but I don't see this as a game-changer kind of move that is going to cause people to reallocate to Europe," says Delwiche. "Taking a ‘wait-and-see’ approach is probably the best advice for advisors."

The European market reacted positively to the ECB's announcement with the Stoxx Europe 600 index rising 0.42% Thursday to 344.99. The euro currency finished up 0.49% late Thursday afternoon after previously dropping to $135.03 earlier in the day. Analysts for Credit Suisse released a report on the ECB announcement on Friday morning estimating that they expect the euro to fall to $1.32 over the next 12 months.

Some industry players were relieved by ECB president Mario Draghi’s decision.

"(It) will allow people to maintain positions, instead of fleeing, and… sustain markets for a while," says Milton Ezrati, a senior economist and market strategist for Lord, Abbett & Co., and an associate of the Center for the Study of Human Capital at the State University of New York at Buffalo. "Ultimately, the deflationary threat makes the ECB's and the Euro Zone's job a lot harder."

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