Inflation fell in the UK

Inflation fell in the UK as expected to 1.7% from 1.9% in the previous month. This news had the impact of boosting shares in London as the FTSE 100 rose over 1% with investors coming to the conclusion that the weaker inflation data will allow rates to stay lower for longer.

Asian markets were once again boosted by the expectation that, after yesterdays weaker than expected economic data, the Chinese authorities will be moved to introduce further stimulation to boost the economy. 

So far, as we pointed out yesterday, the Nikkei 225 index has been one of the worst performing indexes so far this year. Abenomics as it has become known, weakened the yen in 2013 and boosted the stock market, along with the economy, after many years of stagnation. So far this year the economy has not continued to improve, the stock market has fallen as the yen has strengthened, undoing some of last year's good work. Concerns are also being expressed as to what impact the forth coming sales tax may have on the economy. Prime minister Abe will not want to see this series of events continue, therefore it would not be a surprise if the Japanese central bank will once again introduce more policy measures to weaken the yen in another attempt to boost the economy.

In Europe pressure continues to be applied on the ECB to introduce looser monetary policies, in an attempt to ward of the threat of deflation in the eurozone. One has to assume that even if Mario Draghi and the rest of the board manage to resist the temptation, interest rates in the eurozone are likely to remain at these subdued levels for some time. 

We heard from Janet Yellen last week that the Federal Reserve believe that interest rates will remain close to zero for at least 6 months after the end of quantitative easing, that will take it to this time next year.
It rather appears that monetary stimulus will remain in place in all the major economies of the world for some time to come, and in some may increase, particularly while global inflation shows no signs of picking up. Logically this means investors will continue to look for returns from risk assets, and at some stage emerging markets will once again attract investment capital. 

We have been in a bull market for bonds for over 20 years, for those who worry about an equity market rally that has so far lasted five years. Below is a chart of treasury yields and the Dow Jones since 1900. We accept the scales are different, but it is noticeable that when interest rates start to move, how quickly and how far they can move. For those who consider bonds a risk free asset, if you did not know what the two lines were describing I know which one most people they would pick to have their money in.

Posted on March 26, 2014 .