Global equity markets continued the strong run of form that began in October, buoyed by further central bank support. On Thursday, European Central Bank (ECB) President, Mario Draghi, provided reassuring comments which convinced market participants that the ECB are eyeing the next stage of their monetary policy experiment.
The market reaction to Draghi’s dovish remarks demonstrated that the same pavlovian response to monetary policy that we have become accustomed to over the last six years is alive and well. The Euro weakened, equity markets rallied and bond yields moved lower, all on the prospect of more aggressive monetary policy.
Not to be outdone the Chinese stepped up their own monetary policy efforts, cutting interest rates on Friday, for the sixth time since November of last year. The one-year lending and deposit rates were cut 25bps to 4.35% and 1.5% respectively, while the reserve requirement ratio was cut 50bps, effectively lowering the capital banks are required to hold and boosting the availability of credit.
The latest rate cuts from the People’s Bank of China, (PBOC), China’s central bank, follow subdued inflation data and a broader range of economic indicators which have been pointing to a slowdown in the Chinese economy, a source of concern for the rest of the world.
In Europe, the FTSE Eurofirst 300 closed up +3.84% for the week while the standout performer was the German DAX index, rallying +6.83%. The index has been acutely sensitive to news flow from China, an important export market for German companies, so the PBOC’s rate cuts on Friday were well received.
In the US, the S&P 500 index was up +2.07% while the tech-heavy NASDAQ Composite jumped +2.97%. The much quoted CBOE Volatility Index (VIX), the so-called ‘fear index’, a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices, continued to fall as euphoria has returned to the market. .
In Asia, Japan’s Nikkei 225 index rose +2.92% while shares in China were only marginally higher. Meanwhile, commodity prices renewed their slide.
The prospect of the ECB increasing their asset purchase programme in December helped pushed European government bond prices higher last week, as investors looked to front run ECB bond buying.
Yields on peripheral European government debt fell sharply. The German 10-year bond yield declined 5bps to 0.51% while the equivalent Irish government bond yield fell 9bps to 1.07%. The German 2-year government bond yield hit a new record low of -0.32%, highlighting the challenge faced by traditional savers and low risk investors in finding a reasonable return.