The final week of January saw virtually all markets rally in strange unison as ‘risk on’ assets (equities, commodities) rallied while ‘risk off’ assets (U.S. Treasuries, gold, U.S. dollar) rallied as well. In what makes for a difficult market to navigate, it was once again non-economic and non-financial factors making most of the impact on global markets.
Meaningful news in the two volatile circles of oil and equities sparked a rally in both markets last week. As the week began, markets were learning of news of Russia and Saudi Arabia discussing potential OPEC supply cuts in response to the crash in oil prices which resulted in a strong bid for crude oil on the week, finishing up nearly 5%. Last week’s rally in oil prices occurred despite EIA reports of record high U.S. oil inventories and resilient production. Equity markets also rallied sharply on Friday as the Bank of Japan announced a surprise decision to cut rates they pay on certain bank excess reserves into negative territory. Negative interest rates, a previously unthinkable state, now prevail in Japan, Europe, Denmark, Sweden, and Switzerland – covering nearly 23% of global GDP according to Oxford Economics. Stocks rallied sharply on yet another indication that central bank support to stimulate growth and inflation remains strong despite the U.S. inclination to consider reducing accommodations in 2016. Interestingly, U.S. Treasuries fell sharply across the curve in what is typically a flight to quality bid taking 10yr yields back under 2% and 30yr yields back under 3%.
