January was a pretty shocking month for global equities. But it managed to finish with a promising bounce as bulls took heart from the Bank of Japan’s surprise policy easing, along with optimism about the slowing pace of US interest rate rises.
The more positive tone also coincided with a strong rally in oil prices. Brent crude rose to a three-week high.
Whilst January was all about oil, February might be all about FX and central bank policies. There is now an expectation that the US Federal Reserve will only raise interest rates twice this year.
It was however, the Bank of Japan that stole headlines last week after is unexpectedly adopted negative interest rates. We expect the Bank of Japan’s actions to dominate markets for the next week or so.
Compared to other central banks, the Bank of Japan’s negative rate scheme is relatively diluted and seems to be more about providing a signal to the markets. This is especially for FX markets with the Japanese Yen weakening significantly in response.
It’s hard to see a solution to Japan's problems of low growth and high public debt that doesn't involve a much weaker currency. Further depreciation of the Yen will provide a major boost to Japanese equities, which suffered during the recent market turmoil thanks to its close ties with China and the “safe-haven” nature of the Japanese Yen.
As such, it’s likely we’ll see more currency-weakening policies from the BoJ.
There is lots of data due out around the world this week.
The US employment report will be the highlight with employment expected to increase by around 210,000 in January. This should be enough to push the unemployment rate down to 4.9% from 5.0%.
In Australia, the RBA will almost certainly leave interest rates on hold at 2.0% at Tuesday's policy meeting. The publication of the Statement on Monetary Policy will probably reiterate the RBA's recent suggestions that the low rate of inflation gives it room to cut rates further should the economic outlook deteriorate.