Thoughts on today’s Bank of Japan action and Global Equity Markets The Bank of Japan surprised markets overnight by becoming the most recent central bank to move rates into negative territory, albeit only on new excess reserves created by additional QE, and this time with a razor thin 5-4 vote. This comes on the heels of continued weak economic data, and again (their 3rd time in a year) they postponed the deadline for achieving their 2% inflation target an additional 6 months to early 2017.

The Yen weakened dramatically (~2%) overnight as the market was surprised by this seemingly aggressive action in light of recent commentary that additional easing wasn’t necessary. Equity price action over the ensuing couple of sessions will be critical in our view. Central banks appear to be at their limit in terms of affecting any economic benefit with measures such as slightly negative rates, and appear to be devolving into trying to squeak out the last bit of juice from currency devaluation. This is a zero sum game, globally, and ultimately hurts the global economy over the medium term. The only real efficacy left from monetary policy actions in our view is in catalyzing investor confidence, and indeed Japanese stocks did rally more than 2% overnight. However, if these gains don’t hold we’re in a very precarious position. Over the past 6 years market participants have grown accustomed to very sharp bounces after corrections and new highs to be achieved in short order. This bounce we’ve seen in the past couple of weeks however has been much shallower and subsequent rally attempts have been met with swift selling. The market structure appears to be changing from one where dips should be bought to where rallies should be sold. Global economic data continues to disappoint, and with global central banks out of any viable stimulus options we stand at a very dangerous juncture in global equity markets if we can’t move higher in the near term.

Jon Farrin – Managing Partner Sandpiper Asset Management