Canadian bonds outperformed their US counterparts on Monday as oil prices fell and investors sought safety from a broad-based sell off in the domestic equity market. The Canadian 2-year bond yield stood at 0.523% Monday, from 0.534% late Friday, according to electronic trading platform CanDeal. The 10-year bond yield was at 1.447%, from 1.506%. For the benefit of new traders in the market, bond yields move in an inverse manner to bond prices. It is also noteworthy that the Canadian bond market often gets a push from oil prices because of Canada’s heavy dependence on crude exports for economic growth. Canada’s debt securities become more attractive as oil prices fall, due to the dovish effect that this has on the Bank of Canada as concerns interest rates.
U.S. stocks fell slightly on Monday as oil prices fell. Investors seem more focussed on this week’s meeting of the Federal Reserve. The losses were engineered by energy stocks which posted fresh losses after being weighed down by falling crude prices. Energy stocks were seen to fall 2.5% in the S&P 500. Falling prices are a concern for many of the industrial and energy companies. This was the view of chief market strategist at Voya Investment Management, Doug Cote.
Elsewhere, global stocks pulled off a rally as news of the plan by the European Central Bank to expand its stimulus plan for the economy in December pleased investors in that region. Investors’ appetite for equities was further bolstered Friday by a rate cut from China’s central bank.
CENTRAL BANK MEETINGS
The Federal Reserve’s October meeting concludes on Wednesday October 28, 2015. This is at a time when expectations for a rate rise this year have diminished in recent weeks. The uncertainty over the timing of an increase in U.S. rates is making investors pretty cautious for the week. According to Christophe Donay, chief strategist at Swiss investment firm Pictet Wealth Management who believes that the first increase will be announced in 2016, “the Fed’s exit strategy remains a concern and is still ahead of us…”.
Apart from the FOMC meeting, investors also have an eye on the meeting of the Bank of Japan on Friday, at which the central bank could announce further stimulus measures. Robin Brooks, an analyst at Goldman Sachs Inc., is forecasting “substantial” easing by the central bank. Japan’s Nikkei Stock Average closed up 0.7%, while the Shanghai Composite Index was up 0.5%, boosted by the further loosening of monetary policy in China, which was announced after markets closed Friday.
Rounding off the focus on central banks is the one-two punch unveiled by the People’s Bank of China (PBoC) to prop up growth, while also sweeping away a major control on how banks set deposit rates. China’s central bank cut its benchmark interest rates by a quarter-point, and also reduced banks’ reserve-requirement ratios by 0.5% in actions that are aimed at lowering corporate financing costs and pumping liquidity into the economy. This marks the sixth time since November 2014 that the PBoC has cut interest rates and the fourth across-the-board reduction of the amount of deposits banks are required to hold in reserve. The PBoC stated on its website that the measures were put in place as the economy was faced with downward pressure.
China’s goal of achieving growth of about 7% for 2015 has been put at risk by weak factory output, slumping demand both at home and abroad as well as persistent pressure on prices that could negatively impact the ability of Chinese companies to pay off debt. The removal of caps on deposit rates is meant to create greater competition among lenders, which could in turn steer money toward areas that need it most, such as small and private businesses. This would also lift the income that ordinary households earn on their savings, which is a critical factor that it meant to boost local consumption of Chinese factory products. The PBoC’s move comes on the heels of latest GDP figures which show that the Chinese economy grew by 6.9% for the third quarter of 2015.
“It’s a big test to commercial banks now that they can decide on what rates to charge and to pay on their own,” the PBOC senior official said. “Of course we’ll continue to provide window guidance to them.” Following the latest rate cuts, China’s benchmark one-year lending rate will be 4.35% and its one-year deposit rate will be 1.5%.