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Dark clouds ahead?
29 Jul 2016
BOJ underwhelms – JPY soars
29 Jul 2016
PM Bulletin: BOJ look-ahead
28 Jul 2016
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28 Jul 2016
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27 Jul 2016
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 Friday 29 July 2016

BOJ underwhelms – JPY soars

 

 

Indices Update

There was always a danger than the Bank of Japan (BOJ) would disappoint when it came to adding stimulus at the conclusion of its two-day meeting. And that’s exactly what’s happened. The consensus expectation was that the BOJ would announce further monetary stimulus to coordinate with the 28 trillion yen ($265 billion) fiscal stimulus that Prime Minister Shinzo Abe promised on Wednesday. Mr Abe wasn’t expected to reveal anything about the government’s spending programme until next week. The feeling was that by coming out early with a stimulus package which, size-wise, was at the high end of expectations, Mr Abe was putting pressure on the BOJ to come up with something equally accommodative on the monetary side.

But the BOJ did less than expected by keeping its key interest rate unchanged, increasing its ETF purchase programme to 6 trillion yen from 3.3 trillion per annum and doubling its lending program for local companies to $24 billion. The news sent the Japanese yen soaring this morning in a move that took the USDJPY crashing below 103 at one stage. Fortunately, investors had already dialled back their expectations on Thursday. European equities and US stock index futures were slow to react, although soon after the open most were trading in negative territory.

European equities and US stock index futures were mixed in early trade yesterday morning. The evening before the Federal Reserve held off from hiking rates while the accompanying FOMC statement managed to be all things to all people. Anyone who wants to believe that the US central bank is prepared to hike rates in September can point to the FOMC’s comments on the “strengthening” US labour market and diminishing near-term risks to the economic outlook. Others could point to the FOMC expressing caution over the inflation outlook and noting diminishing job gains in June as reasons for the Fed to hold off from tightening until December or beyond. The sell-off in the dollar and bounce in precious metals suggests that it was the dovish take that prevailed market-wise. The Fed may be unwilling to increase rates and risk destabilising financial markets ahead of the US Presidential Election in November.

The FTSE 100 index closed at 6,721.1 down 29.4 points on the day, or 0.4%

The German DAX fell 44.6 points or 0.4% to end the day at 10,274.9

The US30 closed down 15.8 points to finish at 18,456.4. The S&P 500 rose 0.2% to close at 2,170.1 while the Nasdaq 100 rose 0.4% to close at 4,721.4

Equities

Facebook (FB) soared higher in premarket trade yesterday morning after posting blow-out quarterly earnings and revenues. Earnings per share came in at $0.97 on revenues of $6.44 billion against expectations of $0.82 and $6.02 billion respectively. Advertising revenue was $6.24 billion of which $5.42 billion came via mobiles. Analysts had expected overall ad revenue of $5.8 billion of which $4.84 billion was forecast to come from mobiles. The social network also said it reached 1.17 billion monthly active users and 1.13 billion daily active users in June. Last night the stock pulled back off its best levels and closed 1.4% higher at $125.34

Commodities Update

Yesterday morning saw oil prices attempt to rally off multi-month lows. However, the gains were short-lived as both WTI and Brent headed lower as the trading session progressed. WTI is now down around 20% since the beginning of June and off 10% from a week ago. Although slightly less severe, there’s been a similar sell-off in Brent over the same time frames. Both WTI and Brent are now trading below support at $42 and $44 per barrel respectively. Technically, if they close below these levels tonight then there’s a danger of further losses to come.

Investors have been rattled by a supply glut which shows no signs of shrinking. It was only a couple of months ago that a number of agencies were reporting that supply and demand were on course to come back into balance earlier than previously thought. However, inventories of crude and its distillate products continue to grow with US gasoline inventories standing at five year highs. On Wednesday the Energy Information Administration (EIA) reported a build of 1.7 million barrels for the week ending 22nd July. This was way above the consensus expectation of a 2.1 million drawdown. In addition gasoline stocks rose by around half a million barrels. Yesterday data from private research company Genscape reported a 300,000-barrel build of crude stockpiles as at 26th June at the Cushing, Oklahoma hub. At the same time there are concerns that global demand growth is slowing.

Yesterday afternoon gold and silver slipped back from their best levels from earlier in the day. Both metals shot higher on Wednesday, firstly following the release of a poor set of Durable Goods numbers, but then after the release of the Fed’s rate decision and FOMC statement. The Fed kept rates on hold and released a statement which was ambiguous as to the timing of future rate hikes. Some investors interpreted the FOMC statement as leaving the door open for a September hike. This was because the committee noted that the near-term risks to the US economic outlook had diminished, while the employment situation continued to improve. However, most investors now believe that there will be no tightening of monetary policy until December at the earliest. The dollar fell sharply and this helped to lift both precious metals.

It looks as if some profit-taking has crept in for both gold and silver. This could lead to a more substantial pull-back if this leads to fresh short positioning. However, the US dollar is pulling back from recent highs and this should provide some support for the two precious metals.

Forex Update

The Bank of Japan (BOJ) underwhelmed investors at the conclusion of its two-day meeting this morning. The consensus expectation was that the BOJ would announce a large dollop of fresh monetary stimulus to compliment the 28 trillion yen ($265 billion) fiscal stimulus that Prime Minister Shinzo Abe promised on Wednesday. Mr Abe wasn’t expected to reveal anything about the government’s spending programme until next week. The feeling was that by coming out early with a stimulus package which, size-wise, was at the high end of expectations, Mr Abe was putting pressure on the BOJ to come up with something equally accommodative on the monetary side.

But the BOJ did less than expected and failed to match Mr Abe’s promised spending plans. The BOJ kept its key interest rate unchanged, increased its ETF purchase programme to 6 trillion yen from 3.3 trillion per annum and doubled its lending program for local companies to $24 billion. The news sent the Japanese yen soaring this morning in a move that took the USDJPY crashing below 103 at one stage. Fortunately, investors had already dialled back their expectations somewhat on Thursday or the moves could have been more pronounced.

The yen had rallied yesterday as investors dialled down their expectations for further monetary stimulus from the Bank of Japan. Investors squared up positions ahead of the BOJ announcement on fears that the BOJ could come up short on their monetary policy response to Prime Minister Abe’s 28 trillion yen promise on infrastructure spending. Meanwhile the dollar continues to drift lower in a move which began on Wednesday night following the release of the Fed’s FOMC statement. If there was any ambiguity in the statement over the likely timing of future rate hikes. As far as FX markets were concerned the statement pushed back the likelihood of a rate hike to December at the earliest. Thursday saw the dollar lose ground against the euro, yen and Swiss franc although it made gains against sterling.

Upcoming events

Today’s significant economic data releases include Swiss KOF Economic Barometer, Spanish GDP, Spanish CPI, Italian Unemployment, Euro zone CPI, Euro zone GDP and UK Net Lending, M4 Money Supply and Mortgage Approvals. From the US we have Advance GDP, the Employment Cost Index, Chicago PMI, Consumer Sentiment and Inflation Expectations. The European Banking Authority releases the results of its Stress Test at 21:00 BST. 

 

Posted by David Morrison

Category: AM Bulletin


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