Markets under the spell of monetary easing

Further monetary easing helped market participants to tune out signs of a global growth slowdown. The spate of negative economic news between mid-March and mid-April did little to interrupt the rise of equity prices in advanced economies. Further policy easing, followed promptly by an improved US outlook in early May, boosted market sentiment and lifted the main equity indices to new highs.

The Bank of Japan surprised markets in April by unveiling an ambitious new monetary easing framework, triggering a surge in equity prices and a drop in the exchange rate. But the rapid gains left equity valuations vulnerable to changes in sentiment, as witnessed in the recent bout of volatility. The announcement also triggered sharp price movements in the Japanese government bond market as investors weighed the yield implications of official purchases against expectations of higher inflation down the road.

The new phase of monetary policy accommodation in the major currency areas spilled over to financial markets around the world. With yields in core bond markets at record lows, investors turned to lower-rated European bonds, emerging market paper and corporate debt to obtain yield.