The European Central Bank president, Mario Draghi, signaled on Thursday that more stimulus is coming and the world markets loved it. China lowered rates 25 bps to 4.35%. The benchmark deposit rate was lowered by 25 bps to 1.5%.
Chinese officials on Friday mostly followed a well-worn playbook, putting in effect a number of measures designed to help lower corporate borrowing costs. The central bank cut interest rates for the sixth time in less than a year, and it freed up banks to lend more money for the fourth time since November. NY Times
It is expected that Japan will jump back into the stimulus game soon. The world markets responded with the DAX up 6.83%, the CAC 40 up 4.70%, the Nikkei up 2.92% and the S&P 500 up 2.07% last Friday. Here is a look at world markets ytd through last Friday.
By making loans cheaper, China is hoping to encourage companies to spend and invest; however, China is already struggling to cope with a real estate glut and a mountain of debt. So is France, Spain, Greece, Portugal, Japan and the U.S.
It’s kind of like my Philadelphia Eagles using the New England Patriots playbook. The problem globally is debt and all of the Central Banks are hoping more debt will create growth. There is good debt and unproductive debt. We are in the unproductive debt phase. More debt on top of unmanageable debt is not a growth drive. Deflation is the outcome.
The Bank of Japans (BOJ) monetary policy meeting is next to take center stage. Expect additional QE and or an increase in its “annual monetary base expansion” from JPY80 trillion to JPY100 trillion with the newly created currency to be used for purchases of Japanese government bonds and assets such as ETFs and REITs.
The bond bubbles are landing on the books of the global central banks. They are buying equities. For now, in central bankers we seem to pray. As witnessed in the markets around the globe on Friday, the whisper of more stimulus is clearly bullish for risk assets.
The mother of all asset bubbles is in bonds. I expect deflation to continue and rates to be lower for longer. Oh but the risk when your starting place, like today, is ultra-low interest rates.
The Zweig Bond Model updates weekly. It remains bullish on bonds.
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