Bank of Japan move hits a share market sweet spot

Timing makes a big difference to markets. The Bank of Japan’s surprise move to introduce negative interest rates came at a time when world stock markets were already beginning to pull out of their New Year tail spin. This timing helped fuel a large rally in US stock markets on Friday. Although our market had a head start with an opportunity to react the BOJ news on Friday, the ASX 200 looks set to build on these gains in early trade this morning.

The Bank of Japan’s move sets a more dovish tone for major central banks around the world. At the margin, it will increase the incentive for the ECB to add stimulus as it seeks to keep its currency relatively weak. Similarly the Fed and the Bank of England will be a little more cautious about lifting rates.

Friday’s US GDP data gives the Fed reason to be cautious about the pace of interest rate increases. Net exports were a drag on growth, in part due to the negative impact of $US strength on exports. Friday’s move by the Bank of Japan, which saw the dollar jump, will further dampen prospects for US exporters. However, the larger concern for the Fed is moderation in US domestic final sales reflecting consumer caution and weak business investment

Sluggish world growth is a key focus for markets at the moment. With Friday’s soft US GDP data setting the tone, markets will be focussed on today’s release of China’s PMI data. The official manufacturing PMI has been tracking consistently just below 50 and a similar result is expected today.