The European Central bank and the US Federal Reserve both deployed a powerful policy tool overnight – the jawbone. The ECB gave assurances of easy policy for as long as it takes, and Fed speakers backed away from last week’s suggestions of reducing bond purchases as early as mid-2021. Bonds snapped their losing streak and US dollar strength returned. Stock investors were less impressed.
The Fed has now set the parameters for monetary policy discussions for the year, while reminding the world that a stronger economy will at some stage taper Fed bond purchases. Asset pricing indicates investors expect strong government support and an ongoing accommodative stance from central banks to co-exist. Fed speakers over the last week have reminded markets that this sweet spot for asset prices won’t last forever, while maintaining the Fed’s overall stimulatory stance.
The recent bond market sell-off, prompted by higher growth and government funding forecasts, came to an abrupt halt. Yield curves flattened, reflecting lower growth expectations overall. Stocks recorded modest gains for most European and US indices, wholly attributable to renewed interest in interest rate sensitive Utility and Property stocks. Growth exposed Materials, Energy and Industrial shares fell as investors reflected a more balanced outlook.
The mixed central bank messaging left Asia Pacific futures slightly higher in the overnight session. Weakening local currencies may prove supportive for stocks today. China trade data is due around mid-session. Analysts expect that export growth will once again outstrip imports, resulting in a trade surplus of around 450 billion yuan in December.