Stimulating rationality

Policy seems to be setting the standard in the markets as of late. Oil is going up on talks of coordinated cuts across OPEC and Russia. Iron Ore and other china related commodities spiked because of the People’s Congress meeting and the hope of stimulus as a result. Japan’s economy is confirmed to have shrunk in the 4th quarter of 2015, which will have many speculating more simulative measures from that government there as well. With the ECB meeting on Thursday expecting more stimulus and the only question is the method(s) taken this week will be shaped by the events of the ECB (or lack of them) that will set the mood in terms of rates, bank stocks, and commodities. The current speculation of negative rates not having the same effect as asset purchases did when first introduced has caused some concerns among investors that the ECB will have to try and quell. Whether this means taking more asset purchases on, or extending the existing scheme, or both, will he weighed.

​In Japan however the markets have given a clear sign that they are not pleased with the negative rate decision, seeing the Yen spike off the announcement should be looked at by the BoJ as a sign that investors will want a more comprehensive form of stimulus as opposed to negative rates on selective deposits. This measure did more to hurt bank shares and instill panic into the market (causing a flight to safety) than convince the markets that inflation will pick up.

Remember the end goal of all of these simulative measures is to boost inflation expectations, which is changing how market participants think. The difficulty lies in implementing unconventional measures and expecting a rational result in the wake of irrational market volatility. A tall order.