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Well, the Bank of Japan raised interest rates yesterday, and for all the press coverage on the carry trade, the best markets could do was raise a shrug.
In fact, the yen fell to a record low against the euro, and a near-decade low against the Australian dollar, one of the high-yielding currencies carry traders like to put their borrowed yen into.
The market’s confidence came from the BoJ’s assurances that further hikes will be gradual, and an unshakeable belief that the Japanese authorities will not allow the yen to strengthen.
Of course, we all know that putting your faith in governments is a sure way to lose a fortune – and as soon as carry traders realise that Japan’s economic recovery will only allow the yen to stay so low for so long, there‘ll be a rout.
But in the meantime, there were plenty of other nagging little things for investors to fret about – hence the weak day for the stock markets…
The Bank of Japan might have been murmuring soothing noises to investors yesterday, but its Anglo-Saxon counterparts were by no means as thoughtful.
On this side of the Atlantic, minutes from the Bank of England’s interest-rate setting meeting earlier this month showed that two of the nine members of the Bank’s Monetary Policy Committee had voted to raise interest rates again in February, suggesting the rate hike cycle is far from over.
In the US, minutes from the Federal Reserve were more hawkish than most had expected. The Fed said that inflation remained its “predominant concern“, hitting hopes that rates will be cut soon. Good thing too – because data also released yesterday showed that US inflation came in higher than hoped in January. Consumer prices rose at a monthly rate of 0.2%, beating expectations, as prices of food, air travel and medical care rose. And core inflation (which excludes food and energy prices) was up 0.3%.
As one fund manager told Bloomberg: “You’ve got to assume that rate cuts are off the table. This is problematic for stocks.” Investors are extra twitchy because stocks have had such a good run – the S&P 500 has risen for eight months in a row, the longest winning streak since 1996.
Further comments from the Fed didn’t help – The Telegraph reports that vice-president Donald Kohn warned that “investors had mis-priced the level of risk and were assuming a ‘very benign’ climate that might not last.”
Meanwhile, another spectre that investors had thought vanished reared its ugly head once again – the oil price closed above $60 a barrel in New York for the first time this year on concerns that unexpected refinery shutdowns will hit stockpiles in coming weeks.
Of course, as stocks were heading lower, one asset was gaining sharply on the sudden return of fear of inflation – gold. The yellow metal hit a nine-month high in New York, bumping the $680.50 mark in late trading. As Ambrose Evans-Pritchard puts it in The Telegraph, the rapid growth of the US money supply (it rose 10.3% in 2006) is “well over the safe speed limit. The sea of liquidity now appears to be leaking into High Street price pressures, renewing enthusiasm for gold.”
There are lots of ways to invest in gold, all of which you can read more about on our website, by clicking here: Invest in gold
This is no surprise. As inflation rises and the flood of cheap money continues, it’s good to have a more solid asset to hold onto. Particularly as gold is one of the few assets that won’t leave you with a hangover when the cheap money party ends.
Turning to the stock markets…
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In London, the leading FTSE 100 average closed sharply lower yesterday as the poor start on Wall Street, weakness in the mining sector and blue-chips such as Vodafone and Anglo-American weighed. The index fell 55 points to end the day at 6,357. For a full market report, see: London market close.
On the Continent, the Paris CAC-40 index closed 16 points lower, at 5,697, whilst the Frankfurt DAX-30 ended the day 41 points lower, at 6,941.
Across the Atlantic, stocks closed mixed as investors mulled over the latest CPI data. The Dow Jones ended the day 48 points lower, at 12,738. The S&P 500 also closed lower, falling 2 points to 1,457. However, the tech-heavy Nasdaq gained 5 points to end the day at 2,518.
In Asia, the Nikkei achieved a seven-year closing high today with stocks Canon and Toyota amongst the day’s strongest performers. The index ended the day 195 points higher, at 18,108.
Crude oil had fallen below the $60 mark again today and was last trading at $59.70. In London, Brent spot was at $57.79 a barrel.
Having hit a nine-month high of $682.10 in New York last night, spot gold was last quoted at $676.60 today. Silver, meanwhile, had fallen to $14.15.
And in London this morning, the company who administer London’s congestion charge, Capita, reported full year profits of £200.1m. The 18% rise in profits has been attributed to cost savings from an increased emphasis on outsourcing. However, Capita’s shares had fallen by as much as 3% in early trading, with analysts suggesting that the results were not strong enough to justify further gains.
And our two recommended articles for today…
The gold price indicator you should be watching now
– Gold investors are often accused of being ghoulish, waiting as they are to cash in on stock market upsets. But should they be watching stocks and bonds anyway? History suggests that there is a better way to predict the direction of the gold price. If you want to know what it is, click here:
The gold price indicator you should be watching now
Four signs we’re close to a market top
– Stock markets have been hitting fresh record highs recently – but what goes up must come down. To find out how to spot when markets are approaching the danger-zone – and how to adjust your investments accordingly – read:
Four signs we’re close to a market top