In late January, the Bank of Japan (BOJ) surprised global markets with its historical decision to introduce a negative interest rate policy (NIRP) for the first time in its history. In early March, the European Central Bank (ECB) announced a much anticipated stimulus with a broad spectrum of strong policy decisions. These actions were clearly designed to provide a “boost” to the struggling Japanese and developed European economies.
Another driver of financial asset returns during the last quarter was the decision by the Federal Reserve Bank (FRB) to hold back on further rate increases. Clearly impacted by the concerns identified above by other central banks, the more dovish tone was welcomed by market participants. Supporting its move, the FRB cited a moderate U.S. inflation outlook although it does appear that the trend is to the upside. These actions did, at least temporarily, pause the multiyear appreciation in the U.S. dollar, which has since depreciated modestly.
As the quarter came to an end, the weakening dollar helped put a bottom in crude oil prices with nearly a 40% reversal from the lows. Additional factors contributing to the up move were higher-than-normal supply disruptions, sustained demand growth, reduced rig counts and potentially diminished threats from macro risks. Having said that, as we write this note, OPEC and several non-OPEC producers failed to reach an agreement to freeze production during last week’s meetings in Doha. Signals in the oil market continue to be mixed. On the one hand, low prices earlier this year lead non-OPEC producers to lower production (e.g. U.S. and Latin America); on the other hand, preliminary 1Q, 2016 demand surprised market participants to the upside in India and Russia. Time will tell…
Finally, as we look to the current quarter, one must be mindful that a key driver which is likely to impact global markets will be the decision by the United Kingdom to either leave or remain in the European Union (EU). Recently, the International Monetary Fund (IMF) has publicly voiced its concern with the prospect of a “Brexit”, indicating that such a move could have severe consequences on financial assets. Although volatility is a certainty, we will stick to our conviction of using asset allocation as the tool to navigate the complexities inherent in the global financial markets.