Global equities jumped and the yen slumped yesterday after the Bank of Japan stunned markets by adopting negative interest rates, while hopes the US Federal Reserve will slow the pace of future rate hikes also underpinned stock gains.
The BOJ unexpectedly cut a benchmark rate below zero in another bold move to stimulate the Japanese economy as volatile markets and slowing global growth threaten the central bank’s efforts to overcome deflation.
Global equities surged, the yen tumbled and sovereign debt rallied after the BOJ said it would charge 0.1 per cent for excess reserves and may cut rates further if necessary, an aggressive policy pioneered by the European Central Bank.
The yield on benchmark 10-year Japanese government bonds plunged to a record low of 0.09 per cent, and the yen fell 1.87 per cent to 121.03, on track for its biggest daily decline against the US dollar in over a year.
The Nikkei share index whipsawed, but closed 2.8 per cent higher. Shares on Wall Street and in Europe rose more than one per cent, as did MSCI’s all-country world stock index , which gained 1.56 per cent.
A sharp braking of US economic growth in the fourth quarter raised expectations that the Fed would go slow on future interest rate hikes, helping lift equity markets.
The pan-European FTSEurofirst 300 index closed 2.27 per cent higher at 1,348.08. For the month, the index fell 6.2 per cent, its worst January since 2008, but better than a 12 per cent decline at mid-month due to China growth worries.
The Dow Jones industrial average rose 281.13 points, or 1.75 per cent, to 16,350.77. The S&P 500 gained 32.4 points, or 1.71 per cent, to 1,925.76 and the Nasdaq Composite added 71.37 points, or 1.58 per cent, to 4,578.05.
Eurozone bond yields tumbled, with German yields set for their biggest monthly fall in two years following the BOJ’s surprise move. US Treasury yields fell to four-month lows.
Germany’s 10-year Bund yield fell 6.5 basis points to 0.26 per cent, its lowest level since late April 2015. The 37 basis point decline in January was its biggest monthly drop since May 2012.
Benchmark 10-year notes were last up 15/32 in price, pushing their yield down to 1.9313 per cent after earlier sliding to 1.91 per cent, the lowest since October 2.
The euro fell to a session low against the dollar after the US GDP report, dropping 0.91 per cent to $1.0837.
The dollar index, tracking the dollar against a basket of major currencies, rose 1.108 per cent to 99.576.
Oil hit $35 a barrel, marking a gain of about 25 per cent from 12-year lows seen earlier in January, on prospects that a deal between major exporters to cut production could help reduce one of the worst oil gluts in history.