World stocks jump as Bank of Japan rate goes sub-zero

Volatile markets and slowing global growth have threatened the central bank’s efforts to overcome deflation.

The BoJ also warned yesterday over the negative impact of the economic crisis gripping key trading partner China – a crucial driver of global growth – and said it was prepared to cut rates further below -0.1% “as necessary”.

“The dollar initially climbed above 121 yen due to the negative interest rate surprise”, said Shinji Kureda, head of FX trading group for Sumitomo Mitsui Banking Corporation in Tokyo.

Bonds temporarily pared their price gains after data showed that US economic growth slowed sharply in the fourth quarter, but did not stall completely.

USA gross domestic product rose at an annualized 0.7 percent, below an expected 0.8 percent gain, as a strong dollar and tepid global demand hurt exports.

“Four rate hikes this year is not even a possibility. It’s further money printing from Japan on a massive scale after having told the markets that they’re not doing it”, said Will Hamlyn, investment analyst at Manulife Asset Management. “That triggered European investors to push the ‘risk-on” button”.

Policymakers at Japan’s central bank stunned markets with a narrow vote to impose a 0.1% fee on deposits left with the Bank of Japan (BoJ) – in effect a negative interest rate.

The pan-European FTSEurofirst 300 .FTEU3 index rose 1.76 percent to 1,341.41.

Commercial banks normally earn interest when they deposit money with a central bank, such as the U.S. Federal Reserve, instead of putting it into circulation in the economy in the form of a loan. At the time of the London close, Wall Street was also higher, with the Dow Jones industrial average up 1.7%. Despite the rally, the benchmark has fallen 8 per cent this month.

MSCI’s broadest index of Asia-Pacific shares outside Japan added 1.8 percent, up 2.7 percent for the week.

Chinese shares also rallied following the Japanese rate move but still suffered their biggest monthly fall for seven years. After reaching a 15-month low last week, the Stoxx 600 got a boost from Mario Draghi’s comments that the European Central Bank may reconsider its policy stance in March.

Germany’s 10-year Bund yield DE10YT=TWEB fell 6.5 basis points to 0.26 percent, its lowest level since late April 2015.

Fed fund futures 0#FF: rose to imply a rate of 51 basis points by year end, compared with 90 basis points a month ago.

“As the BOJ has done its move, now the European Central Bank will follow suit”.

Benchmark 10-year notes were last up 15/32 in price, pushing their yield down to 1.9313 per cent after earlier sliding to 1.91 per cent, the lowest since October 2.

The yen fell broadly, with the euro rising 1.2 percent to 131.54 yen, while the Australian dollar surged 2.1 percent to 85.92 yen.

The dollar index .DXY , tracking the dollar against a basket of major currencies, rose 1.1 percent to 99.594.

Oil rose to $35 a barrel, a gain of about 25 percent from the 12-year lows seen earlier in January, on prospects that a deal between major exporters to cut production could help reduce one of the worst oil gluts in history.