Global equity markets enjoyed another positive week, buoyed by further support from the major Central Banks, this time the Bank of Japan (BOJ) with the introduction of negative interest rates. As well, speculation of a possible production cut by OPEC pushed oil prices sharply higher and boosted energy related shares. Brent crude oil surged +8.20% last week, to $34.30 per barrel.
In Europe, the FTSE Eurofirst 300 Index rose +1.18%. The French CAC 40 index rose +1.85% but the performance of the German DAX index was relatively muted, up +0.34%, given its sensitivity to events in China. Heavily weighted to energy, the UK’s FTSE 100 Index was one of the standout performers, up +3.11%, as oil prices surged higher. In the US, the S&P 500 index was up +1.75%. In Asia, Japan’s Nikkei 225 index surged +3.30%. Last week was another challenging week for mainland Chinese shares, with the Shanghai Composite Index of mainland shares falling -6.14%, bringing the decline in January to -22.65%.
Government bonds also moved higher last week. With yields moving inversely to prices, the German 10-year bond yield declined 15bps to 0.34%. The US 10-year treasury yield fell 12bps to 2.03% while Japan’s 10-year government bond yield moved down 11bps to 0.10%. The move in bonds markets reflects a weaker economic backdrop in 2016 and in response the prospect of central banks pursuing more aggressive monetary policy. This will put further pressure on defined benefit schemes, and traditional savers who are earning nothing on their cash.
Despite previously saying that negative rates would not happen in Japan, Haruhiko Kuroda, BOJ Governor, persuaded his monetary policy colleagues to introduce a negative deposit rate on cash balances held with the Bank, above certain thresholds. The decision was passed with a slim majority though, with five members of the committee voting for and four members voting against. (For more information on the mechanics of this decision, read “Key Points of Today’s Policy Decisions” from the BOJ)
The market reaction over the last two weeks to the prospect of more central bank support – Draghi’s reassuring comments on January 21st and the Bank of Japan’s announcement last week – suggests that the same pavlovian response to monetary policy that we have become accustomed to over the last six years is alive and well. The Yen weakened, equity markets rallied and bond yields moved lower, as market participants interpreted the decision to introduce a negative deposit rate of -0.1% as a sign that the Bank of Japan are prepared to employ more aggressive easing measures.
European equities have opened lower this morning after a mixed session in Asia overnight. The slump in Chinese equities continues, while the Japan’s Nikkei 225 Index logged further gains, up +1.98%.
Key macro data includes purchasing manager index (PMI) reports from around the globe. In Europe, the latest retail sales data will be released. In the US, the employment situation report will be keenly watched on Friday, providing an update on the labour market, a key indicator for US monetary policymakers.
On the monetary policy front, the Bank of England (BOE) will hold their monetary policy meeting, with no change in policy expected. The Bank of England will also release the minutes from the previous meeting and the latest quarterly Inflation Report, which sets out detailed economic analysis and inflation projections used in the decision making process when setting monetary policy.