Equity gauges are mixed and investors are increasing exposure to government bonds as a dip in the oil price hobbles the recent “risk on” rally.
The pan-European Stoxx 600 index, which has risen 8.5 per cent over the previous five sessions, is down 0.3 per cent after Japan’s Nikkei 225 led a soft Asian performance with a 1.4 per cent loss. US index futures suggest the S&P 500 will add 3 points to 1,921 later on Friday, writes Jamie Chisholm, the FT’s Global Markets Commentator.
A Wall Street three-day winning streak — its longest since late December, predicated on rebounding banking and resources stocks — came to an end on Thursday courtesy of a sell-off in retail shares and renewed weakness in oil prices.
New York’s failure to extend its recovery — the S&P 500, closed on Monday for a holiday, had risen more than 5 per cent since February 11 — has damped sentiment globally.
Energy market volatility remains heightened, with oil prices at one point in the previous session hitting multi-week peaks on hopes for an output freeze, only to stumble following the release of US crude inventories data.
On Friday, Brent is down 0.6 per cent at $34.10 a barrel and West Texas Intermediate is off 0.9 per cent at $30.50.
Oil prices remain near multi-year lows, and while that should be a positive for growth, they are putting a damper on inflation and complicating central banks’ efforts to reach inflation targets. Investors will turn their attention to US inflation data due later on Friday.
“Lower oil prices are helping recovery/aiding growth in most parts of the world, including the US and Asia,” said analysts at DBS.
“And behind all the loud headlines about falling oil prices, core inflation continues to quietly march northward. When oil prices stabilise, we will finally discover whether they were holding core prices down. If the answer turns out to be yes, core inflation would accelerate all the more quickly thereafter,” they added.
However, weak January trade data for Asian countries including China, Japan, Taiwan and South Korea point to a significant deterioration in global trade and have only strengthened the case for more monetary easing, according to HSBC.
“In light of growing downside risks to what is already a tempered growth outlook, we expect further rate cuts from many of the region’s central banks. .. [including] in Japan, where the Bank of Japan introduced a negative interest rate policy in January,” they added.The yen has continued to strengthen in spite of the BoJ move. The Japanese currency is 0.3 per cent firmer at Y112.96 per US dollar, around a one-week high.
The euro is up 0.2 per cent to $1.1120 as traders wait to see if the European Central Bank also will ease policy further at its March meeting. Sterling is down 0.1 per cent to $1.4312 as dealers jostle during an EU summit that may determine whether Britons vote for “Brexit”.
Analysts at Bank of America Merrill Lynch note that negative interest rates have thus far failed to lift inflation expectations in Japan as well as in the eurozone and Switzerland, while there has been only moderate success in Sweden.
“In our view, the ineffectiveness of NIRP could be due to the market interpreting it as policy exhaustion as markets require ever-increasing accommodation to achieve the same outcome,” they said.
Government bonds reflect the low rate environment. Yields for US, German and Japanese paper, are a few basis points softer on the day at 1.73 per cent, 0.19 per cent and a record low of just 0.01 per cent respectively, according to Reuters data.
Gold, which is typically sensitive to interest rate moves, is down $7 to $1,225 an ounce, however, but has gained sharply in recent weeks as investors anticipate central banks will need to further open the stimulus spigot.
In Asia, the Tokyo stockmarket’s dip still left it up 6.8 per cent for the week, however, its best performance since October 2014, when the Bank of Japan boosted the size of its asset-purchase programme.
Last week, Japanese shares suffered their worst weekly drop since the financial crisis, falling to their lowest levels since roughly around the time of the BoJ meeting, while the yen was at its strongest point in just as long.
On Friday, Hong Kong’s Hang Seng slid 0.5 per cent, but was still poised for a 5 per cent gain for the week. Australia’s S&P/ASX 200 fell 0.8 per cent but was ahead 3.9 per cent over the past five sessions. On mainland China, the Shanghai Composite fell just 0.1 per cent.