This week

Stimulus package of 28 trillion yen being introduced by japan to devalue the yen. This was to try and combat the negative effect of a too strong Yen on japan stocks who get most of their revenue from overseas that will need to be converted back to yen and will also reduce the volume of their sales abroad as goods are pricier. This boost in exports will revive the economy.

10 year government bond yields rose at bonds were sold off and investors sought riskier assets such as stocks that would benefit from an injection of cheaper capital in the economy.

Weaker services sector results points to a BOE cut

In banking sector, European banks such as credit agricole and societe generale beat analyst estimates. Whilst HSBC and standard chartered missed estimates.

A rate cut to 0.25pc by the UK is going to squash banks’ profits in terms of interest they earn on loans and it is possible that this could prompt banks to cut rates on deposit accounts to below zero in order to maintain that spread in bank profits. Even if the rate cut makes customers highly uncomfortable, it will please central banks – the aim of lower rates is to encourage borrowing and spending, pushing firms and households to spend now rather than waiting for tomorrow.

Current inflation rate uk – 0.5%

Target rate of inflation – 2%

 

After rate cut of 25 basis points and 70bn quantitative easing i.e. government buying back bonds 

  • Pound down dropping 1.6% against the dollar and down against all major currencies
  • FTSE 100 up 1.6% and 250 rises in the wake of the announcement as lower interest rates better for companies, including the housing sector that has seen a slump in demand. Bad for bank stocks however like LBG, however BOE did say that banks could borrow at the base rate provided they continued lending – so no negative rates
  • Uk gilt yields dropping as bond prices rise