The stock market has succesfully negotiated some major news events this week but it’s too early to relax. The Bank of Japan will announce its decision on monetary stimulus today. Tonight will see release of the latest European bank stress tests as well as statistics on US GDP growth. All of these are events with the capacity to change investor thinking on the market outlook.
The Bank of Japan appears to be getting close to the limits of its ability to buy more bonds and to drive interests deeper into negative territory. There are also question marks over what,if any, difference incremental additions to monetary stimulus will have either on the Japanese economy or to international capital flows. This leaves open the question of how much impact modest additional stimulus will have on markets beyon the initial announcement affect. However, the Japanese stock market in particular is likely to be nervous about failure to act and any indication that the BOJ’s stimulus policy is coming to an end. On the other hand an unexpectedly aggressive stimulus involving helicopter money would be well received by stock markets.
Australian 10 year bond yields are testing recent lows at 1.84% this morning in a sign that investors are anticiptating an RBA rate cut next week. Despite lower rates, caution prevails in the stock market with the major banks and other “yield stocks” mixed in early trading.
Resource stocks are a little weaker this morning despite another rally in the spot iron ore price yesterday. Recent gains have partly been driven by a replenishment of China’s iron ore inventory. This process appears to be getting close to completion and may remove a source of support for iron ore prices before too long.