The conundrum continues

Equity markets reacted in a surprisingly positive way on Wednesday to the very gloomy outlook for the global economy the IMF were painting. One can only assume as the IMF call for more action from central banker’s to stimulate growth, equity investors, who as we read on Wednesday appear cautious, realise at worst the current interest rate environment will remain largely unchanged in the near future at least, and that helped boost equity prices.

In another effort to boost growth in Japan, there is speculation that the Japanese pension fund may increase their purchase of equities, from the current monthly three trillion yen. Governments have from time to time bought equities, despite its politically sensitive nature. During the Asian crisis the Chinese International Trust and Investment Corporation bought Asian equities to help restore confidence in the economy. When the ECB talk of possible further options open to them, instead of buying corporate bonds or 10 year Bunds yielding next to nothing, could this be what they are considering?  It is certainly a point we have argued in this blog before.

Better than expected import export data out of China also helped the general equity tone. Chinese exports rose 11.5% year on year in March against a year on year fall of 25% in February and a consensus expected rise of 2.5%. One of the few bright spots in the IMF report was the 0.2% upgrade to the outlook for the Chinese economy, the IMF now forecast growth this year of 6.5%.

Aside from a further bounce in the oil price, whether the bounce was part of the cause of the equity bounce or the effect of it is hard to tell, but this also helped sentiment. The final piece of the jigsaw was better than expected earnings numbers from JP Morgan. Sentiment for banks is poor at present, no deals for investment bankers to chew on, and low interest rates hitting margins contributing to the negative view. It is often the case when bad news is expected in a share price, the shares already discount that news and rally on the facts.

Coming closer to home after the slightly higher UK inflation data earlier in the week this news did not once again move Mr McCafferty to be the lone wolf and vote for a rate hike. The vote remained 9-0 to keep rates where they are. The minutes of the last meeting revealed that the Bank’s committee members near term concerns evolve around the possible impact of a “Brexit”. The likely conclusion is again that rates are unlikely to be moving from current levels in the near future. 

Posted on April 15, 2016 .