Global Market Overview

Last updated: January 22, 2016 9:07 pm

Hopes of central bank support lift stocks

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A man walks past an electronic board showing Japan's Nikkei 225 outside a brokerage in Tokyo, Japan January 12, 2016. Japan's Nikkei fell 2.7 percent after a market holiday on Monday, closing at its lowest in nearly a year, while U.S. stock mini futures were in the red pointing to a weak start. REUTERS/Toru Hanai©Reuters

Friday 21:00 GMT. The prospect of further support from the world’s central banks helped lift some of the gloom in global markets this week, with oil prices pushing back above $32 a barrel and US stocks securing their first weekly gain of 2016.

But the improvement in risk appetite only came after a number of benchmark stock indices slid into “bear market” territory — defined as a drop of 20 per cent from cyclical highs — and oil hit levels not seen for more than 12 years.

A clear trigger for the turnround in sentiment came from very dovish comments on Thursday from Mario Draghi, president of the European Central Bank, which many in the markets viewed as signalling that further stimulus measures could be unveiled in March.

“Although the [ECB policy] meeting is seven weeks away, could Thursday have marked the start of another plate-spinning cycle from the central banks?” asked Jim Reid, macro strategist at Deutsche Bank.

“The market chatter is now looking towards [Bank of Japan governor] Kuroda to signal more action when the BoJ meet this time next week. Will [Federal Reserve chairwoman] Yellen also signal a more cautious and dovish stance at the Fed’s Open Market Committee meeting next Wednesday?”

Analysts at Nomura said that while Fed tightening expectations had diminished considerably, a move in June was still their base case.

“We expect most other central banks in the G10 space — ECB, BoJ, Reserve Bank of Australia, Bank of Canada, Reserve Bank of New Zealand, Riksbank, and Norges Bank — to ease monetary policy in the first half of 2016, or to at least remain dovish and concerned by the global outlook and weak inflation,” Nomura said.

Steve Barrow, head of G10 strategy at Standard Bank, said hopes for a sign from the Fed that it might not be in a rush to raise interest rates again in March could sustain a recovery in asset prices — at least temporarily.

“However, the way to get recovery in risk assets like stocks on a sustainable basis is through robust growth that justifies the tightening the Fed wants to do,” he said.

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As the market tumult continues, central banks have been having their say on the global climate. Hans Redeker of Morgan Stanley explains to Roger Blitz the choices ahead for the eurozone, Japan and the US.

“It is not likely to come if the US/global economy slips, inflation slumps and the Fed is forced to stall further tightening, or even revert to near-zero rates and more QE.

“If we’re right about this, any lift that Mr Draghi gives risk assets now might prove to be a false dawn when it comes to the long haul.”

But such concerns cut little ice in the world’s stock markets on Friday, as the prospect of further “central bank puts” appeared to unleash a wave of pent-up buying enthusiasm.

At the close in New York, the S&P 500 index was up 2 per cent to 1,906.9, just off the session’s high of 1,908.85, and up 1.4 per cent on the week. The move trimmed the year-to-date drop for the equity benchmark to 6.7 per cent.

The CBOE Vix volatility index — the so called equity “fear gauge” — was down 16.5 per cent in late trade at 22.30, well down from the week’s intraday high of 32.09.

The pan-European Stoxx 600 share index gained 3 per cent, and was 2.6 per cent higher over the five-day period. The Nikkei 225 in Tokyo leapt 5.9 per cent on Friday, its best one-day showing in four months — but was still down 1 per cent on the week.

The rally for global stocks came as Brent oil settled at $32.18 a barrel — up 10 per cent on the day, and nearly 19 per cent up from a 12-year low of $27.10 hit on Wednesday. For the week, Brent was 11.2 per cent higher.

US West Texas Intermediate crude swung through a similar trajectory.

“The main positives were hints of additional monetary policy support from the ECB and the absence of any more bad news from China ,” said Capital Economics.

“Oil also benefited from Saudi comments that prices as low as $30 are ‘irrational’, although the imminent blizzard in the US seems likely to provide more tangible support than mere rhetoric from Opec.”

Improved risk appetite helped turn around gains made at the start of the week by “havens” such as gold, US Treasuries, and the yen.

Gold was down $3 at $1,097 an ounce — still up $9 on the week but well off Wednesday’s one-week high of $1,109. The dollar was at a two-week peak of Y118.79, up 0.9 per cent on the day and 1.5 per cent on the week. It hit a one-year low of Y116.91 on Wednesday.

The 10-year Treasury yield, which moves inversely to the price of the note, was up 4 basis points at 2.06 per cent, 3bp higher over the week.

The German 10-year Bund yield bounced 3bp on Friday to 0.48 per cent, after it touched a three-month low on Thursday on the prospect of further ECB asset purchases. The euro was down another 0.8 per cent against the dollar at $1.0791, and down 1.1 per cent from a week earlier.

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