Collective Sigh Of Relief Ahead Of The Weekend

Like a car ignition that finally catches after several attempts, the global markets are building on the recovery seen in North America yesterday. Asian stocks rallied, with the Nikkei leading the way with a 5.9% rally. More modest 1.25% gains in Shanghai Composite allowed Chinese stocks to finish the week with small gains. Australian, Korean, and Thai shares have also finished higher on the week. European bourses are higher, and the Dow Jones Stoxx 600 is up 2.5%. Not only is it poised to post a weekly advance but so are most of the major markets, except Italy, which had been a star performer last year.   

Core bond yields are highs, including a three bp rise in both 10-year Treasuries and Bunds. Peripheral European bond yields are off 4-9 bp.  Oil prices are extending yesterday’s gains. Brent is flirting with $31 after finishing last week below $29. The spread between Brent and WTI is a few cents. On Wednesday, the March light sweet crude contract reached a low near $27.55. 

There are two main drivers.First there is a widespread sense that the moves in the market had taken a life on of their, unhinged from fundamentals.However, given money management considerations, few buyers wanted to stepinto the fray.Reports suggest there are high levels of cash to be deployed, and the sharp sell-off since the start of the year has created opportunities for The value investors. 

Second, to the extent that there was a fundamental consideration, it may have been that many participants thought the central banks were done.What was seen as timid action by the ECB last month, and apparently operational tweaks by the BOJ, with the Fed hiking, may have given the impression that officials no longer had the ability and/or willingness to do more to support asset markets (which also means compressing volatility).  

However, in recent days, three things have happened.  First, the Fed funds futures market had discounted not the four hikes the Fed has suggested, or even the 2-3 hikes that we thought likely, but a single hike this year.Second, there have been some reports, albeit conflicting, suggesting that the Abe government may encourage the BOJ to ease policy further.Yesterday Draghi was clear.The ECB has the desire and ability to achieve its mandate and unequivocally signaled that the March meeting was live in the sense that its policy options would be reassessed.