Bank of Japan provides the fireworks

The week ended strongly as the Bank of Japan took equity markets by a surprise announcement of an extension of their own bond purchase program. This move led to the developed equity markets of the US and Europe finishing up between 2.5 and 3.0% on the week. The Nikkei 225 closed the week up over 7.5%. We often make the point that central banks remain solidly behind stimulating economic growth, and Friday’s move by the Bank of Japan demonstrated that point. The move will probably reinvigorate the debate about QE driving risk assets into bubble territory.  With that in mind it is worth noting that as nearly 75% of the S&P 500 stocks have reported their earnings, growth for the third quarter is coming in over 7% against expectations of 4.5%.

The US dollar continued its climb to a four year high, on the back of the better than expected Q3 gdp report, the move by the Bank of Japan as well as confirmation the Federal Reserve have complete the winding down of QE3.

The weaker oil price seems to be finally feeding into the US economy as consumer confidence hit a seven-year high. 

The Vix closed the week back below 15 as investors, according to Merrill Lynch, bought the dip. Equity inflows hit $20bn for the week, the largest in over a year. Even European equities saw inflows. More proof that investor confidence improved in the past week as high yield bonds saw the second week of inflows after 7 weeks of out flows.

The week ahead will be dominated by the ECB’s latest rate decision on Thursday. There will be no change to current interest rates in the euro area, but once again Mario Draghi will face questions on how he intends to expand the balance sheet by the 1trn euro’s promised. There was some speculation the ECB may look to buy corporate bonds; this question is bound to come up. One expects Mario Draghi will want to remain non-committal in his answer, however he will probably dangle the carrot of expectation. The US economy will provide the usual array of economic reports for economists to poor over. In the UK we also get a rate decision on Thursday, again no change is expected, what will be of more interest will be the release of the minutes in a couple of weeks time to see if the current 7-2 vote in favour of keeping rates where they are remains. On Thursday we also get the latest manufacturing and industrial production data.

It never ceases to surprise how quickly sentiment for equity markets can change, and once again the past couple of weeks activity have only gone to highlight this fact. 

 

Posted on November 2, 2014 .