Europe
It’s been a positive end to what has been a disappointing month for equity markets, after the Bank of Japan caught investors unawares by unexpectedly cutting rates into negative territory for the first time ever, in the process joining the European Central Bank and the Swiss National Bank into the realms of experimental monetary policy.
This unexpected turn of events has helped send the FTSE100 to its second successive weekly gain, though broader European markets have lagged behind, which is a little worrisome given their broader export focus to Asian markets.
Over the past few years central banks around the world have continually indulged in a tug of war to deliver monetary stimulus to engineer the economic conditions required to unlock a modicum of economic growth as well as some modest inflation.
Unfortunately monetary policy doesn’t operate in a vacuum and in so doing these policymakers appear to be becoming involved in race to the bottom. For every action by one central banker we get an equal and opposite reaction by other central bankers as monetary policy spin its wheels against Newton’s third law of motion, and we get a form of currency pass the parcel.
This morning’s actions by the Bank of Japan have followed in the footsteps of the Swiss National Bank and the European Central Bank in cutting rates into negative territory as policymakers seek to stem the decline in pricing pressures rippling out from recent declines in the Chinese yuan, and lower commodity prices.
While this is likely to help undermine the recent appreciation in the Japanese yen, it is highly likely that these actions could prompt similar easier monetary policy from Chinese authorities as they look to offset the deflationary forces at work in their own economy, and is also likely to make that much more difficult for the US Federal Reserve to tighten further in the coming months, and that’s before we even talk about further measures from the ECB, which are expected in March.
This would suggest that the overall net effect of these measures on the domestic economies of each country, or region is likely to be minimal at best and while we’ve seen a pop in asset prices there is worry that the direction of travel here is prompting concerns about diminishing returns, in the absence of broader structural reforms.
Today’s gainers have been fairly broad based with Sainsbury shares jumping on reports that its takeover bid for Home Retail has become stuck in the mud.
Banking stocks are also higher, though at some point the question has to be asked with interest rates so low, pressure on profits margins is likely to come under further strain and make it more difficult for banks to turn a profit with yield curves starting to not only flatten out, but drop below zero. HSBC, Barclays (L:BARC) and Standard Chartered (L:STAN) are all higher.
Sky shares have also moved higher after the company reported strong revenue growth in the first half of this year. The shares may well also have been boosted by speculation that the reappointment of James Murdoch as CEO might be a pre-cursor to a renewed bid by News Corp. This seems unlikely given that the same hurdles that prevented a bid the last time are equally as valid this time around. It won’t stop people speculating though.
US
US markets opened higher after this morning’s surprise decision by the Bank of Japan to drop rates into negative territory.
Stocks in focus include Xerox which is set to split into separate companies
American Airlines also reported better than expected profits, helped in no small part by lower fuel costs, while the flip side of that equation saw oil giant Chevron (N:CVX) post its full quarterly loss since 2002.
Amazon (O:AMZN) shares have also come under pressure after the company missed its latest earnings forecast by quite some way reporting profits of $1 per share, some way below the $1.56c expected.
On the data front US Q4 GDP came in at 0.7%, slightly below expectations of 0.8%, though personal consumption was slightly better than expected. It is also doubtful as to whether recent December data has been included in these numbers, which might suggest the possibility of further downward revisions.
In the manufacturing sector it would appear that we’ve seen a “V shaped” rebound in Chicago PMI after the January number came in at 55.6, the highest level since January last year, after two successive monthly readings below 50 at 48.7 and 42.9.
FX
It’s been a day for the US dollar today, rising sharply against the yen after this morning’s surprise cut to interest rates by the Bank of Japan. The Norwegian Krone has also slipped back after three successive days of gains as concerns over whether recent rhetoric over production cuts will translate into anything actionable which is serving to limit the upside.
The pound has also pulled back from one week highs against the US dollar as a result of this pull back in the green back, as traders focus once more on divergences in monetary policy, helped in some part by a sharp rebound in US manufacturing activity in January.
The euro has also slipped back as European bond yields slip further into negative territory, with 2 year yields for Germany well into negative territory at -0.48%, well below the current deposit rate of -0.3%.
Commodities
Oil prices have continued their gains but have slipped back from two week highs over concern that for all the chatter about production cuts, any final outcome is likely to disappoint, assuming the various interested parties can even agree on a meeting.
A slightly stronger US dollar has weighed on gold prices today but the yellow metal still remains on course to post its best monthly performance since January last year.
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