How Windy Is It . . . ? Monday, 14th March 2016 – No.170
How windy was it last week?
Over the past four weeks stocks have staged an impressive rebound from the February lows: The recent rally has pushed volatility back down, perhaps too low.
The European Central Bank (ECB) unveiled an aggressive expansion of their current stimulus package, cutting its deposit rate by 10 bps and lowering other policy rates by 5 bps. The package also included a 20 billion euro increase in the monthly pace of quantitative easing. To accommodate the larger monthly purchase, the ECB also expanded the opportunity set by adding purchases of corporate non-bank investment grade debt. Finally, in order to promote further lending by banks, the ECB added four, four year targeted longer-term refinancing operations (TLTRO) at very attractive yields.
The initial reaction on Thursday was mixed. Stocks ended the session lower following comments from ECB President Mario Draghi suggesting that further rate cuts were unlikely. However, stocks, particularly banks, did recover quickly and managed to stage a strong rally on Friday.
China confirmed its 2016 GDP growth target of 6.5%-7.0% annual growth on the opening day of the National People’s Congress. This will come alongside a continued supportive stance on monetary and fiscal policy. Notably, the inflation target was set at 3% for CPI (double 2015’s inflation rate), which is conducive to further interest rate cuts. Whether China can actually deliver on their growth rate expectations remains to be seen.
Elsewhere, The Reserve Bank of New Zealand unexpectedly cut rates to a new all-time low of 2.25%. Although this was expected, the markets did not expect it to be so sudden. However, the impact on the world markets has been unaffected.
The positive run for commodities also continued, and there is evidence of more positive fund flows towards Emerging Markets. As such, we think the better market sentiment should continue, as long as central banks don’t upset the party.
This week we have the FED, Bank of England (non-event) and Bank of Japan meeting.