Our market is heading for a solid, 37 point gain later this morning when trading resumes after the Bank of Japan dropped its monetary easing bombshell on markets on Friday afternoon and sparked a big rally.
In fact our market was well into the red on Friday when the Bank of Japan (BOJ) decision was released and it then bounced firmly back into positive territory, jumping 50 points or more in afternoon trading.
As a result of BOJ move, markets eded higher Friday – up in Asia with Japan up 2.8%, China up more than 3% and our market rising a more sedate, still solid 0.6%. That trend spilled over into other regions and Eurozone shares rose 2.3% and the US S&P 500 added 2.5% by the close early Saturday, our time.
The move to charge negative interest rates by the BoJ came after the release of weak data, especially inflation, for Japan for December, but still the central bank’s move shocked markets as there had been no hint of any radical change in its already huge quantitative easing program.
Many analysts expected more bond buying, not the more dramatic move to lower rates paid to banks to a negative 0.1%.
Currencies moved as well – the yen sold off, the US dollar rose and the Aussie dollar remained above 70 US cents – but that was down 2 US cents from the December close at around 72.90 US cents.
The BoJ move has changed markets which will take a while to settle down after the frenetic activity of Friday.
The move means the BoJ joins the European Central Bank among the world’s major central banks in charging banks to hold surplus funds.
Smaller central banks, such as in Switzerland, Denmark and Sweden are also charging banks interest (paying negative interest rates) and an estimated $US5 trillion of government bonds are now in negative territory around the world and hundreds of billions of dollars worth of private sector bonds (from top line companies such as Switzerland) are in a similar position.
The surprise move triggered a boom in government bonds in Japan, Europe and the US where the yield on the key 10 year security settled at 1.92%, down sharply over the week.
Yields in Germany fell sharply – a massive 19% in one day, while the yield on Japanese 10 year bonds more than halved to 0.1% that was down a huge 55% as investors charged into safe havens that still pay interest.
Yields on short dated government bonds (up to 2 years) fell sharply, with some either dipping into negative territory, or becoming more negative. Our 10 year bonds ended at an attractive 2.63% on Friday, according to Bloomberg.
So watch for rising foreign interest in Australian bonds, shares and other securities where interest rates and returns range above 2%. It could see more upward pressure on the Aussie dollar and force an unwilling Reserve Bank to cut interest rates in coming months.
The BoJ decision, announced on Friday afternoon, provided a strong boost at the end of the week for risk assets, and a strong end for January after the first half sell-off.
As a result Japanese shares gained 3.3% over the week, US shares rose 1.8%, Eurozone shares ended up 1.1% and the Australian share market gained 2.9%.
Despite a rally on Friday, Chinese shares still lost 6.1% last week. Commodity prices also rose with oil up 4.7% and the $A remained solid.
For the month of January, our market slumped 5.5%, the S&P 500 on Wall Street lost 5.1%, the Dow dropped 5.5% and the Nasdaq plunged 7.9% in what was its biggest monthly loss since May 2010.
The fall in Australia was also the biggest drop since 2010 for January (when the ASX 200 fell 5.8%).
The Shanghai market had a miserable January, losing 22.7%, European markets as measured by the Stoxx 600 index fell 6.4% and were down double that at one stage. Hong Kong lost more than 10% and Tokyo fell 8%.
Britain’s FTSE 100 fell 2.5% and New Zealand’s NZX 50 lost 2.4%.
In other markets gold rose, oil and copper fell in January, but had better weeks last week.
