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23 Sep 2016
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22 Sep 2016
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22 Sep 2016
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21 Sep 2016
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21 Sep 2016
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20 Sep 2016
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20 Sep 2016
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19 Sep 2016
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16 Sep 2016
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16 Sep 2016
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15 Sep 2016
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15 Sep 2016
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14 Sep 2016
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13 Sep 2016
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09 Sep 2016
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 Wednesday 21 September 2016

AM Bulletin: Mixed messages from BOJ



Indices Update

Overnight the Bank of Japan (BOJ)kept its key interest rate unchanged at -0.1%, abandoned its monetary base target (and said this could expand until CPI inflation exceeds 2%) and introduced a target yield for the 10-year Japanese government bond (JGB) of zero, effectively taking control of the first 10 years of the bond market and yield curve. So far there has been no evidence of the “comprehensive assessment of the BOJ’s current quantitative and qualitative easing (QQE) and negative interest rate policies” but maybe that will be part of Governor Kuroda’s press conference.

Ahead of the BOJ meeting there was speculation that the central bank was set to loosen monetary policy further. But analysts were unsure what form this would take. Now we know and investors have reacted “positively” to the news – for now. Global stock index futures, the dollar, gold, silver and oil were all firmer in early trade while the yen has weakened. This strikes me as odd in some ways. I can understand some market relief that there wasn’t another interest rate cut. This would have been very damaging for financial institutions. It would reek of desperation and back in January the yen soared when negative rates were first adopted. But having a zero target for the 10-year may mean that the BOJ has to sell rather than buy bonds, assuming it hasn’t already completely bust its own bond market. Likewise, abandoning its monetary base target is problematic as the BOJ is running out of stuff to buy. Maybe it will start selling at some stage. After all, buying assets has only helped to misprice bonds and equities. So far all its efforts have failed to boost growth, spur inflation or weaken the yen. There’s very little chance that what it has done today will improve anything.

Yesterday’s trading action in European and US equities was somewhat unusual. Most of the major indices managed to push higher despite a pull-back in oil prices and despite uncertainty ahead of crucial meetings by the Bank of Japan and US Federal Reserve. Only the Italian MIB and Spanish IBEX failed to push higher. However, gains were limited as investors kept their powder dry ahead of the central bank meetings.

The US Federal Reserve will announce its interest rate decision this evening. There’s very little likelihood that the central bank will tighten monetary policy. Not only has recent US economic data been patchy of late, but the Fed has done nothing to prepare the markets for a rate hike. If it announced an increase in its fed funds rate then we can expect market turmoil. While the Fed knows it has to push rates up from current levels, it won’t risk cratering the bond and equity markets with a shock move ahead of the Presidential Election.

The FTSE 100 ended the day 17.2 points higher at 6,830.8

The German DAX rose 20 points or 0.2% to end the day at 10,393.9

The US30 closed up 9.8 points to finish at 18,129.9 The S&P 500 ended up 0.03% at 2,139.8 while the Nasdaq 100 rose 0.2% to close at 4,805.2


Yesterday FTSE100 constituent Kingfisher PLC (KGF) reported a pre-tax profit of £427 million for the six months ended July 31. This was up from £386 million for the same period last year. Revenues came in at £5.75 billion compared to £5.49 billion a year ago. The company, which owns the B&Q and Screwfix, said that strong growth in the UK and Poland together with favourable exchange rate movements all contributed to the strong first-half earnings. In addition, Kingfisher said there had been no drop-off in demand attributable to the UK’s Brexit vote back in June. The company raised its interim dividend to 3.25 pence per share from 3.18 pence for the same period last year. The stock ended the day 2.1% lower at 368.8 pence.

Commodities Update

Oil prices slipped in early trade yesterday on fears of oversupply. Venezuela's energy minister Eulogio Del Pino claimed that global supplies would have to decline by around 10% from a current 94 million barrels per day for output to meet consumption levels. Yet many OPEC members continue to pump at record levels. The latest data showed that Saudi Arabia produced 10.6 million barrels per day in July. This was an increase of over 120,000 from the previous month and represented a fresh record high.

On top of this, traders were nervously preparing for the latest US inventory update from the American Petroleum Institute (API) which was released after last night’s close. The consensus expectation was for a build in crude stockpiles of 3.4 million barrels for the week ended 16th September. However, there was a draw of 7.5 million barrels and crude shot higher.

The world’s major oil producers are set to meet in Algeria next week to discuss freezing production. On the face of it an agreement could help to stabilise the oil market. However, an output freeze would require establishing unprecedented levels of trust between fractious countries. Even if an agreement is reached (which seems extremely unlikely) there would be very little chance that all countries would stick to it. Not only that, but any price rise which comes on top of a freeze would lead to a pick-up in US shale oil production.  

Gold and silver managed to inch higher again yesterday despite a modest improvement in the US dollar. Overnight the Bank of Japan (BOJ) announced fresh measures designed to boost growth, lift inflation and weaken the yen. Both precious metals rallied after the BOJ kept its headline interest rate unchanged, but set a 0% target for 10-year JGB yields and abandoned its target for monetary base.

Ahead of the announcement there was very little consensus over what the Japanese central bank may do. Governor Kuroda and his colleagues were under pressure to provide further monetary stimulus. However, they were obviously concerned about the possibility of a negative market reaction to their decision. Investors were split over whether the BOJ would cut interest rates further into negative territory, change the size or make up of its asset purchases, try to steepen the yield curve or do nothing at all.

Now all eyes turn to tonight’s announcement from the US Federal Reserve. The market expectation is that the Fed will hold off from raising rates. Yesterday evening the CME’s FedWatch Tool assigned an 85% probability of no hike, down from 88% on Monday. This means that the markets are unprepared for Fed tightening. Nevertheless, investors will pay close attention to the FOMC’s latest Summary of Economic Projections. This includes a forecast from all 17 FOMC members over how they see the fed funds rate changing over time. According to Fed Funds futures, the market assigns a 54% probability of a December rate hike.

Forex Update

Currency markets had a relatively quiet session on Tuesday as investors and traders held off from taking on additional exposure ahead of key central bank meetings from the US Federal Reserve and Bank of Japan. One notable exception was sterling as the British pound hit its lowest level against the US dollar since mid-August and hit a one-month low against the euro. There was no specific news to push sterling lower and the move looked mainly technical. Cable fell sharply at the end of last week as the dollar rallied following the release of the latest US CPI inflation data. This came in higher than expected and there was a knee-jerk response from traders who calculated that the stronger inflation numbers increased the likelihood of a Fed rate hike. Yesterday the GBPUSD sliced below 1.3000 while the EURGBP broke above 0.8600

The yen was a touch stronger ahead of the BOJ meeting and announcement, with the USDJPY coming within a few ticks of 101.50. However, the yen fell sharply after the BOJ kept its key interest rate unchanged at -0.1%, abandoned its monetary base target (and said this could expand until CPI inflation exceeds 2%) and introduced a target yield for the 10-year Japanese government bond (JGB) of zero, effectively taking control of the first 10 years of the bond market and yield curve. So far there has been no evidence of the “comprehensive assessment of the BOJ’s current quantitative and qualitative easing (QQE) and negative interest rate policies” but maybe that will be part of Governor Kuroda’s press conference. Investors appeared to give the BOJ the thumbs-up initially. However, a few hours after the decision the yen began to strengthen. At the time of writing the USDJPY was unchanged suggesting that not everything is rosy in the BOJ’s garden.

As far as the Fed is concerned, the market expectation is that the FOMC will hold off from tightening monetary policy. A number of economic data releases over the past few weeks indicate that the US economy isn’t as robust as the Federal Reserve would like us to believe. Last week’s US Retail Sales data was pretty grim and this is expected to negatively affect estimates for third quarter GDP. The weak data reduces the likelihood of a Fed rate hike tomorrow evening.

Upcoming events

Today’s significant economic events include the latest update for UK Public Sector Net Borrowing and the Bank of England’s Quarterly Bulletin. From the US we have Crude Oil Inventories and the Fed’s rate decision, statement, Summary of Economic Projections and Janet Yellen’s subsequent press conference.


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Posted by David Morrison

Category: AM Bulletin

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