29th Jan 2016 12:14
LONDON (Alliance News) - UK and European equities traded higher midday Friday, after the Bank of Japan surprised the market by cutting interest rates into negative territory in order to help achieve its inflation target and bolster a stuttering economy.
Before the London market open, the Japanese central bank said its policy board voted 5-4 to apply an -0.1% interest rate on current accounts that financial institutions maintain at the bank. The board said it will cut the rate further into negative territory, if judged necessary.
The negative rate will affect only a portion of current accounts as the Bank of Japan adopts a "three-tier-system". The outstanding current account balance of each financial institutions will be divided into three tiers to which a positive, zero and negative interest rate will be applied.
The central bank also downgraded its fiscal 2016 inflation forecast to 0.8% from 1.4% estimated in October. It expects inflation to reach 1.8% in the year ending March 2018, a touch lower than its 2.0% target.
The Bank of Japan, led by Governor Haruhiko Kuroda, maintained its target of raising the monetary base at an annual pace of about JPY80 trillion.
The move to cut Japanese interest rates took the market by surprise, with many participants expecting the bank to expand its asset purchase plan instead.
"Despite repeatedly stressing, even as recently as last week, that he was not seriously considering a cut in the interest rate paid on excess reserves (IOER), Kuroda today unveiled '[quantitative and qualitative monetary easing] with a negative interest rate', with the IOER to be cut from +0.1% to -0.1%," said Chris Scicluna, head of economic research at Daiwa Capital Markets.
"While we do not doubt the significance of today's decision, the impact will not be quite as substantive as the size of the headline rate cut initially appears," Scicluna said.
"Unlike the [European Central Bank], where a single rate applies to all excess reserves, the BoJ has introduced a multi-tiered system, closer to the arrangements in place in Sweden, Switzerland and Denmark. As a result, the impact on the average interest rates on bank reserves will be weaker than the headline rate might imply," he added.
Nevertheless the move sparked a rally in Asia, with the Japanese Nikkei 225 index closing up 2.8%, while the Hang Seng ended up 2.5% and the Shanghai Composite up 3.1%.
In London, the FTSE 100 index was up 1.0% at 5,991.92 at midday, the FTSE 250 was up 0.8% at 16,332.00 and the AIM All-Share up 0.3% at 689.66.
European stocks also were benefiting from the Japanese rate cut. The CAC 40 in Paris was up 0.7% and the DAX 30 in Frankfurt up 0.4%.
European stocks also digested the latest inflation figures from the eurozone. Flash data from Eurosat showed harmonized consumer prices rose 0.4% year-on-year in January, faster than the 0.2% increase seen in December. This was the fourth consecutive increase in consumer prices and matched economists' expectations.
Core inflation, excluding energy, food, alcohol and tobacco, increased slightly to 1% in January from 0.9% in December. Economists had forecast prices to rise again by 0.9%.
Ahead of the open in New York, futures pointed to a higher open. The Dow 30 was pointed up 0.7% and the S&P 500 up 0.7% as well, while the Nasdaq 100 was up 0.5%.
Poor results from Amazon after the Wall Street closing bell on Thursday were weighing on the Nasdaq. The online retailer reported a fourth-quarter profit and revenues which fell short of Wall Street estimates. The stock was down 11% in premarket trade.
On the London Stock Exchange, J Sainsbury was one of the best performers in the FTSE 100, up 2.9%, while Home Retail Group was the biggest decliner in the mid-cap FTSE 250 index, down 8.9%, after the Financial Times reported takeover talks between the two companies are understood to have stalled due to a disagreement over price.
Citing people close to the matter, the FT said the two companies have remained entrenched in their positions, with a wide gap between their respective valuations of the Home Retail business.
Sainsbury's made a bid for Home Retail, which owns Argos and Homebase, in November, which the pair said was rejected. Under UK takeover rules, it has until Tuesday to make a firm offer for the group or walk away from the talks.
Since then, Home Retail has agreed to sell the Homebase business to Australian conglomerate Wesfarmers. Sainsbury's interest was in the Argo business, however.
Sky also was one of the best performers in the FTSE 100, up 2.0%. The broadcaster said it has reappointed James Murdoch, son of Rupert Murdoch, as chairman, succeeding Nicholas Ferguson, as the company reported revenue growth for its first half and strong customer growth in its second quarter.
Murdoch was previously chief executive of Sky between 2003 and 2007 and chairman between 2007 and 2012. Martin Gilbert, chief executive of Aberdeen Asset Management, has been appointed deputy chairman, with Andrew Sukawaty to replace Gilbert as Sky's senior independent director.
The reappointment of Murdoch, four years after leaving the role amid the News Corp phone hacking scandal, left analysts somewhat puzzled. Jefferies said the move "is obviously an intriguing development".
For the half year to end-December, Sky posted a pretax profit of GBP414 million, down from GBP1.21 billion a year before, mostly as a result of exceptional profits from the sale of the company's stake in ITV in the year comparative period not repeating.
Interdealer broker Tullett Prebon was one of the best mid-cap performers up 6.4%. The company said revenue rose 14% in the final two months of 2015 compared to the previous year, helping to take its revenue growth for the year to 13%.
Tullett said its revenue in 2015 was GBP796 million, up 13% from the GBP704 million it reported in 2014. Excluding PVM Oil Associated and its subsidiaries, which Tullett acquired in November 2014, revenue was down 1%. The company expects its 2015 full year underlying profit margin to be higher than it had previously indicated at around 13.5%.
Scottish drinks company AG Barr, which makes Irn-Bru, said the soft drinks market in the UK has remained challenging but said it expects its results for the financial year to the end of January to be in line with its expectations.
AG Barr said its revenue for the fourth quarter to the end of January is expected to grow around 2.5% year-on-year, a slowdown on the 5.0% annual growth it reported a year earlier. The company said the soft drinks market in the UK remains challenging and highly competitive, though it said its trading strategy and brand activities helped it deliver a solid performance. AG Barr traded up 3.0%.
Still ahead in the economic calendar, the first reading of US fourth quarter GDP is at 1330 GMT, as are the employment cost index and personal consumption expenditures prices. The Chicago Purchasing Managers Index is at 1445 GMT, and the Reuters/Michigan Consumer Sentiment Index is released at 1500 GMT.
By Neil Thakrar; [email protected]; @NeilThakrar1
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