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It's been a busy week for the markets, as multiple pieces of economic data and policy moves have come to suggest that no knee-jerk reaction is likely to rock the world's financial markets. The US Federal Reserve expectedly maintained status quo on interest rates, as it can afford to be "patient" before beginning to normalise its monetary policy. Taking note of the dovish tone of the Federal Reserve, the 10-year benchmark bond yield fell six basis points to 1.72 per cent on Wednesday even as the US dollar remained firm. Despite the dovish tone of the Fed, US stocks fell on as oil prices failed to show any sign of an up move.
Global markets are expected to be oiled by a fresh bout of liquidity coming from the Euro zone, as the European Central Bank has joined the quantitative easing party last week with its $60 billion a month bond buying programme. Alquity's global market strategist Chris Wehbe has questioned the latest round of easing and whether it can prop up global growth. He says in a note: "Renewed stimulus will help support near term global GDP, but will this be the final round in an easing cycle that has brought us to the lowest yields in history, or is this just a continuation of ever more anaemic growth and yield?" ECB's bond buying programme, strategists believe, will work in three ways. First, it will see central bank injected money finding its way into other assets. Second, it will improve liquidity in the market, as there is a guaranteed buyer, and this would encourage trading in bonds and thus drive down premiums driven by fears of illiquidity. Finally, it would also signal a change in the market's expectations on short-term rates and inflation.
Global strategists expect several countries to continue easing rates to defend either their currency pegs or prop up economic growth. The Danish central bank has cut rates twice and strategists expect Sweden and Norway to follow suit. In addition, the Bank of Canada eased interest rates by 0.25% to 0.75% earlier this week. Going by these moves, markets are now pricing a delay in rate hikes from the US and UK.
The market is closely watching for signs of easing from the world's second largest economy China too, as its December quarter GDP growth missed its targeted rate of 7.5%. China's Q4 GDP grew by 7.4%, which is a 24-year low. China's flash PMI marginally recovered in January at 49.8 from December's 49.6. From the look of it, world's central banks are gearing to prevent a sharp slowdown born out of economic deflation.
