Wealthy Nations Daily Update - ECB - BoJ

Relative calm was evident today as US markets are closed for Presidents’ Day and China returns to work after the week long Lunar holiday. Our markets closed upbeat on Friday, spurred by a tidy $3 per barrel  bounce in Brent (around +12% from the lows) combined with a positive day for stock markets in Europe and America. We thus start this week with a risk-on attitude with prices moving higher across the board.

Indeed the Nikkei led the charge with a bounce of over 7% overnight, a good correction from the 16.7% fall from the first few days of February into last Friday. This bounce was almost certainly the result of technicals as Japanese GDP once again disappointed. GDP for the Q4’15 fell 1.4% qoq ann. offsetting the 1.3% bounce we had seen in Q3’15. Unfortunately for PM Shinzo Abe, weakness was concentrated in private consumption; undermining his efforts to bolster growth and inflationary levels.

We have mentioned a number of times that we feel QE is deflationary and works against both the BOJ and the ECB’s efforts to fight deflation. Scandinavia’s largest bank has now put out a report arguing that negative interest rates being used by both the ECB and BOJ are indeed the wrong tool for both these central banks adding “negative rates only helps defend a country's currency regime”.

They highlight Denmark as an example: with negative rates for over 3.5 years and having moved to -0.75% at the beginning of 2015, to head off speculators hoarding their AAA-rated assets. The report looks into the effect of negative rates on bank lending and finds no evidence of any support from negative rates to the real economy. “Negative rates really haven’t been a success story”, policymakers are getting “more and more desperate” and the ECB risks “getting stuck in a vicious circle” Nordea’s chief economist commented.