Markets Take a Trip to Normalcy as Traders Await the ECB

There are times when the fundamentals get thrown out the window and greater forces take over the market. The first part of this week was a prime example as investors decided en masse to do some rebalancing by shifting out of stocks that have outperformed largely because of sheer momentum into those that have lagged, namely deeply discounted value stocks. This shift did little to overall valuations, with the MSCI All-Country World Index gaining a grand total of 0.01% on both Monday and Tuesday.

Markets returned to some sense of normalcy on Wednesday, with the MSCI surging as much as 0.72% to its highest since the start of August. The move may be a sign investors are confident the European Central Bank on Thursday will pull out the proverbial bazooka to spur the region’s flagging economy and encourage other major central banks to follow suit. That means not only cutting interest rates and turning dovish on the outlook for rates but also announcing a plan to resume quantitative easing by buying at least 40 billion euros ($44 billion) of bonds each month for a year. Such speculation was reinforced by a rally in euro zone government bonds Wednesday and the Bloomberg Euro Index touching its lowest since mid-2017. But it’s also likely the ECB stores the bazooka and pulls out the pellet gun instead. Bank of France Governor Francois Villeroy de Galhau is one of several ECB policy makers who have signaled skepticism over the need for renewed QE. In fact, some strategists including James Bianco of Bianco Research consider the ECB’s decision to be perhaps the most important central bank decision of the next few weeks, and that includes the Federal Reserve’s meeting on Sept. 18.