Markets Disapointed By BoJ Stimulus, USD Weaker On Soft U.S. GDP Growth, ASX SPI200 Futures Up 17 Points

The big news on Friday was the decision by the Bank of Japan to loosen monetary policy further, mainly by increasing the amount of ETFs held from 3.3 trillion yen to 6 trillion (US$58.7 billion), as well as increasing the banks’ lending program of U.S. dollars from US$12 billion to US$24 billion. The market was clearly underwhelmed by this decision, with the Yen strengthening +3.09%, while two year and 10 year Japanese government bonds gaining 9.7 basis points to -0.25, and 8 basis points to -0.19 respectively. To equity markets, and both the Nikkei & Topix indices swung between gains and losses before finishing +0.56% & +1.2% higher respectively. The chart below highlights the intraday volatility across the Nikkei & Topix indices.

This was a clear case of buy the rumour sell the fact. While it is easy to say that in hindsight, it is somewhat of a growing theme where we see the markets expecting too much from central banks who are already stretched to their limits. Despite the market clearly expecting more than was delivered, it was important that the BoJ was seen to act rather than not, any indecision would send a message to the markets that perhaps its experiments had failed.

Attention will now turn to the BoJ’s September meeting for which Governor Kuroda has instructed staff to “conduct a comprehensive assessment of the developments in economic activity” and the effects of its QQE program and negative interest rate. This type of review has not been undertaken before and will certainly cause speculation as to whether we will now see a change in direction from the BoJ.

Data releases from Japan also showed that prices remain in deflation, with CPI (YoY Jun) at -0.4% as expected while a less volatile measure excluding food and energy had a reading of 0.4% vs expectations of 0.5%. Industrial production fell less than expected with an actual of -1.9% against forecasts for a -2.9% drop, retail trade (YoY Jun) decreased -1.4% vs -1.2% expected, large retailers sales (YoY Jun) -1.5% vs -0.8% expected. The only positive note was the jobless rate (MoM Jun) which fell to 3.1% from 3.2% in line with expectations.

Over in the U.S. and the initial reading for GDP for the second quarter was far below expectations of 2.5% with a reading of 1.2% while personal consumption (QoQ Q2) increased less than expected, up 4.2% vs forecast of 4.4%. A measure of consumer confidence by the University of Michigan (MoM Jul) also declined to 90 vs 90.2 expected. This has now pushed rate hike expectations back further with equities responding positively to the disappointing data, both the S&P500 & Nasdaq100 gained +0.16% & +0.19% respectively, the U.S. dollar index fell -1.25%, two year government bond yields declined 5 basis points to 0.6554, ten year bond yields were also down 5 basis points to 1.4531.

Commodity prices were generally higher thanks to a weaker USD, despite an increase in the number of U.S. oil rigs WTI Crude oil gained +1.12% while Brent crude was -0.56% weaker. Copper prices gained +0.57%, natural gas +0.1%, iron ore -2.19% while precious metals spot gold and silver rose +1.16% & +0.84% respectively. The second image below shows the reaction of spot gold and silver to the weaker U.S. GDP figures.

In Europe data showed the unemployment rate remained steady at 10.1% as inflation picked up slightly with CPI (YoY Jul) surpassing estimates of 0.1% with actual of +0.2%. GDP for the second quarter also surpassed expectations, up 1.6% year on year with forecasts for a 1.5% gain. The Euro gained +0.88% as equity markets rallied, the DAX30 up +0.61%, Euro Stoxx 600 +0.71% and FTSE100 up +0.05%.

Locally the ASX200 was relatively flat on Friday, up just +0.1% at 5,562.36 while the market looks set to open stronger this morning with ASX SPI200 futures up 17 points. If you’re interested in trading global markets and still need practice, click here to open a free $100,000 Rivkin Trader account. 

Data releases:

·         Australian TD Securities Inflation (YoY Jul) 11:00am AEST

·         Chinese Manufacturing & Non-manufacturing PMI (MoM Jul) 11:00am AEST

·         Chinese Caixin Manufacturing PMI (MoM Jul) 11:45am AEST

·         Japanese Nikkei Manufacturing PMI (MoM Jul) 12:00pm AEST

·         U.S. Construction Spending (MoM Jun) 12:00am AEST

·         U.S. ISM Manufacturing Survey & Prices Paid (MoM Jul) 12:00am AEST

Chart 1 – Nikkei & Topix Indices


Chart 2 – XAUUSD (Spot Gold) & XAGUSD (Spot Silver)


Source: Rivkin, Bloomberg

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This article was written by James Woods - Global Investment Analyst, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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