World shares hit an eight-month high on Thursday as the Bank of England prepared to deliver its Brexit defense plan, a move investors believe could set off another round of global central bank- and government-led stimulus.
Talk of more action from Japan had lifted sentiment ahead of a BoE policy statement, and European markets opened with shares up 1 percent, bonds in reverse and sterling and the euro firm against the dollar and the yen.
Most economists polled by Reuters expect the BoE will cut rates to a record low of 0.25 percent, followed by a reactivation – probably in August – of the QE bond-buying program it adopted as the financial crisis raged in early 2009.
Mark Carney, the head of the BoE has said he is not a fan of the negative interest rates the European Central Bank and the Bank of Japan are employing, so the scale and shape of BoE ‘QE2′ has become the focus for financial markets.
“Having already seen Carney come out of the gate early, we are for sure going to see something from the BoE,” said Aviva Investors’ head of rates Charlie Diebel.
“The question really is whether we get shock and awe and they cut by 40 basis points and start talking about credit easing (QE or further cheap loan offers), or we get something a bit more measured.”
The yen was the day’s big currency mover.
It fell to 105.54 yen per dollar, down 4 percent since the start of the week, which if it holds will be the sharpest drop since 1999 and the sixth biggest since the end of the Bretton Woods era over 40 years ago.
Helping fuel the move was a report that former U.S. Federal Reserve Chairman Ben Bernanke had floated the idea of perpetual bonds with one of Prime Minister Shinzo Abe’s key advisers in April.
Abe called for fiscal stimulus, expected to reach about 2 percent of GDP, following an upper house election victory that strengthened his grip on power on Sunday.
“We’ve heard a lot of talk about fiscal policy out of Japan. Something will happen on that front. The big question is whether there will be further monetary easing and coordination of the two,” said Societe Generale’s Alvin Tan.
The pan-European STOXX Europe 600 and the FTSEurofirst 300 indexes were up 1.1 percent and 1.0 percent respectively in early deals, at their highest since June 23, when Britons voted to leave the European Union.
Wall Street futures pointed to U.S. markets adding to their record highs later too, and among commodities Brent oil prices bounced back to $46.50 per barrel after losses of over 4 percent on Wednesday.
Emerging markets remained firmly on the front foot as they continued to benefit from the prospect of more cheap money from big central banks.
Like MSCI’s 46-country All World index, EM stocks were at eight-month highs after a searing bond rally too in recent weeks.
Malaysia’s ringgit hit a 10-week high as the government bond prices extended gains after a surprise interest rate cut on Wednesday.
The South Korean won also touched its strongest level in more than 10 weeks after Bank of Korea kept its rates unchanged and investors bought the won versus the weakening yen.
“This is a yield-hungry environment and EM does stack up as an asset class that does offer yield,” said Steve Ellis, a portfolio manager at Fidelity International.