Silver as an investment

Global Stocks Rise After “Disappointing” BOJ Announcement: All Eyes On Janet Yellen

While the BOJ may have disappointed with its latest iteration of monetary policy, now known as “QQE with Curve Control”, Asian and European stocks as well as U.S. equity index futures rallied in early trading perhaps on the back of the bounce in the USDJPY which has now completely faded. That said, the BOJ’s “Reverse Operation Twist” which hopes to steepen the JGB curve, has provided support to global financial institutions, which are broadly higher.

For those who missed the earlier explainer, here is what happened in a nutshell: The BOJ left the -0.10% policy rate unchanged as generally expected, however the breaking news is the introduction of QQE with ‘yield curve control’. The BoJ has scrapped the average maturity targeting for JGB’s and has stated that it will buy JGB’s so ‘10y yields remain around the current level’. The statement also includes the passage that the ‘monetary base may fluctuate to achieve yield-curve control’ and that the BoJ is ‘committed to expanding the monetary base until CPI is stable above 2%’. As DB’s Jim Reid effectively put it, the main takeaway to us is a tweaking of QQE rather than outright further stimulus.

And while both 10Y JGB yields and the USDJPY jumped in the initial kneejerk reaction, they have since recovered much of the earlier move, and worse – the USDJPY was trading at session lows.

Meanwhile, treasuries and the dollar were little changed before the Fed policy decision at 2pm Eastern, while oil rallied before a meeting of producers next week.

Banks and insurers led gains in equities as the BOJ refrained from moving deeper into negative interest-rate territory and shifted the focus of its stimulus to controlling the yield curve, Bloomberg reports.

After sliding in the aftermath of the announcement from Japan’s central bank, the yen and government bonds pared losses. A gauge of the dollar’s strength held near a seven-week high, while oil jumped toward $45 a barrel.  The BOJ’s shift, which includes plans to target 10-year JGB yields at around the current level of 0%, gives it scope to keep loosening policy to revive growth and inflation, while limiting the negative impact on financial companies’ earnings. “Going forward the BOJ said it can still undertake further easing, and given its new framework will allow it to undertake more negative rate cuts while mitigating the downside impact on financial institutions’ profitability,” Mansoor Mohi-uddin, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “The risk is for more easing action in the fourth quarter.”

And now all eyes turn to the Fed which will be hard pressed not to disappoint like the BOJ, which as we noted earlier, generated a largely negative kneejerk response among Wall Street commentators. Yellen will make her announcement in just over 7 hours, where – with all but four of 102 economists surveyed by Bloomberg predicting the Fed will hold off from raising interest rates – she is expected to do nothing, while lowering rate hike expectations further. As a reminder, this is where the Fed’s infamous “dots” were one year ago: we show this just in case anyone still had any faith in the Fed’s “forward guidance.”

In won’t stop with Yellen however: central bank authorities will continue to hog the limelight on Thursday with speeches due from the new governor of the Reserve Bank of Australia as well as the heads of the European Central Bank and the Bank of England. In addition, central banks in countries including New Zealand, Norway and South Africa have policy decisions due that day.

Meanwhile, in global markets, the MSCI All-Country World Index rose 0.4% as, with the Stoxx Europe 600 Index gaining 0.8 percent and the MSCI Asia Pacific Index up 1.4%. Japan’s Topix index jumped 2.7%, with gauges of banks and insurers soaring more than 5 percent on optimism higher long-term bond yields will alleviate a squeeze on their profits. Japanese markets will be shut Thursday for a holiday.

The Topix rose by more than the Nikkei 225 Stock Average as Japan’s central bank said its on-going purchases of exchange-trade funds will be concentrated more heavily on the broader benchmark.

Futures on the S&P 500 Index added 0.4 percent, having extended gains after the BOJ’s announcement.

More important than stocks, Japan’s 10-year bond yield increased by as much as seven basis points to 0.005 percent after the BOJ said it would adjust purchases of sovereign debt to keep the rate around zero. It subsequently declined to minus 0.035 percent. The rate on 10Y USTs rose by one basis point to 1.70 percent and Germany’s yield increased by two basis points to zero.

Market snapshot

  • S&P 500 futures up 0.4% to 2140
  • Stoxx 600 up 0.9% to 344
  • FTSE 100 up 0.4% to 6859
  • DAX up 1% to 10497
  • German 10Yr yield up less than 1bp to -0.02%
  • Italian 10Yr yield down less than 1bp to 1.25%
  • Spanish 10Yr yield down 2bps to 0.96%
  • S&P GSCI Index up 1% to 353.6
  • MSCI Asia Pacific up 1.4% to 141
  • Nikkei 225 up 1.9% to 16808
  • Hang Seng up 0.6% to 23670
  • Shanghai Composite up less than 0.1% to 3026
  • S&P/ASX 200 up 0.7% to 5340
  • US 10-yr yield down less than 1bp to 1.68%
  • Dollar Index down 0.01% to 96.01
  • WTI Crude futures up 2.1% to $44.98
  • Brent Futures up 1.8% to $46.71
  • Gold spot up 0.4% to $1,320
  • Silver spot up 1.2% to $19.44

Global Headline News

  • Fed Focus Turns to Dots as Hike Odds Fade: Decision-Day Guide: FOMC meeting may be ‘contentious’ even if hawks outnumbered
  • BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve: Board keeps benchmark interest rate unchanged at minus 0.1%
  • Yen Pares Drop Versus Dollar After BOJ Shifts Policy Framework: Currency bounces back from weakest level since Sept. 14
  • Stocks Rise as BOJ Policy Boosts Banks Before Fed; Oil Climbs: Stocks rallied around the world as tweaks to BOJ’s monetary stimulus offered support to financial institutions
  • BOE to Cut Rates Again as Economists See Sharp Slowdown in 2017: Growth will slow to 0.7%, worst outcome since last recession; BOE’s Saunders Says U.K. May Be Stronger Than Economists Predict: Says rise in jobless rate would be an argument for lower rates
  • Oil Advances Near $45 as OPEC May Hold Formal Meeting in Algiers: Algeria says 1m barrel-a-day cut needed for rebalancing
  • VW Investors Sue for 8.2 Billion Euros in Germany Over Diesel: investors seeking damages for losses stemming from the company’s emissions-cheating scandal
  • America Movil CEO Says Co. Interested in Buying Oi: co. is monitoring Oi’s judicial recovery process, Valor Economico reports, citing interview

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Looking at regional markets, Asian stocks shrugged off early caution and traded mostly higher following the BoJ policy overhaul announcement. Nikkei 225 (+1.9%) initially underperformed with sentiment weighed on by poor trade figures after exports fell for an 11th consecutive month, however the index shrugged off losses after the BoJ policy decision in which they kept rates unchanged at -0.1% and monetary base unchanged but left the door open for future rate cuts and expansion in monetary base, while it maintained its commitment to hitting the 2% inflation target and introduced QQE with yield curve control. Elsewhere, ASX 200 (+0.7%) was lifted by commodity names as WTI crude futures advanced to test USD 45/bbl after a 7.5mln bbl drawdown in API crude inventories, while Shanghai Comp (+0.1%) and Hang Seng (+0.6%) were indecisive as all focus turned to the BoJ. 10yr JGBs weakened significantly with pressure seen after the BoJ announced to adopt QQE with yield curve control and to targets 10yr yields to hover around 0%.

Top Asian News

  • BOJ Shifts Policy Framework to Targeting Japan’s Yield Curve: Stocks surge while yen weakens
  • Japan’s 10-Year Bonds Tumble After BOJ Targets Yield Near Zero: 10-year govt bond yields went positive for first time since March
  • China Paves Way for Major Government Influx Into Venture Capital: Country’s cabinet urges state sector to play bigger role
  • China’s Postal Bank Said Poised to Raise $7.4 Billion in IPO: Lender plans to price its sale of 12.1b shares at HK$4.76 apiece, below midpoint of marketed range
  • RBA’s New Boss Greeted by Trader Bets That Cuts Almost Done: Swaps show 73% chance RBA rate won’t go any lower in 2016
  • AC Milan’s Chinese Buyer Said to Show False Bank Letter in Talks: Chinese group said to give letter showing funding capability

In Europe, Christmas came early for central bank fans today, with the BoJ dictating newsflow and price action this morning, ahead of the Fed and RBNZ rate decisions later on in the day. The BoJ inspired gains in the Nikkei filtered through to European bourses, with all major indices in the green and the DAX hovering around the 10500 level. On a sector breakdown, financials are among the best performers this morning, again following on from their Japanese counterparts in the wake of the BoJ’s bank-friendly yield curve targeting, with analysts at RBC suggesting they cannot rule out the ECB taking similar measures in the future. European fixed income markets have seen less of an impact from the BoJ, largely shaking off the latest developments and trading modestly lower this morning, albeit closing the opening gap to see the German benchmark hovering around the 164.00 level. In terms of supply from the session, the German 2021 Bobl auction was relatively well-received with a b/c of 1.7 but failed to cause much traction in the Bobl future.

Top European News

  • U.K. Business Activity Has Slowed, Remains Positive: BOE says in quarterly agents’ summary of business conditions
  • Arrow Global Said to Attract Interest From Buyout Firms: Firms including Apax said to have weighed potential takeover
  • ABB to Sell Cable Business to NKT Cables for $934 Million: ABB to announce progress on review at investor day Oct. 4
  • Ubisoft to Sell $445 Million of Bonds to Finance Game Projects: Bonds are convertible into shares to after five years
  • Inditex Earnings Beat Estimates as Zara Owner Expands Online: Sales increased 13% during first weeks of 3Q
  • Luxury London Home Values to Fall Most Since 2008 on Brexit: Savills says buyers will wait to see outcome of negotiations
  • Majestic Wine Plunges as Naked U.S. Setback Leads to Profit Blow: Shares fall most since market debut almost 20 years ago
  • Aviva Is Looking at M&A Opportunities in Poland: CEO Tells Puls: Co. seeks to boost its presence in Polish property insurance, CEO tells newspaper
  • Diageo Says Set Up to Deliver Stronger Results in FY17: co. comments in statement

In FX, the Bloomberg Dollar Spot Index held near its highest level since July. The yen slipped 0.1 percent to 101.82 per dollar, paring a drop of as much as 1.1 percent. The BOJ said that the monetary base target, which previously had been set at annual increases of 80 trillion yen ($780 billion), may now fluctuate in the short term as policy makers seek to control the yield curve. It also pledged to expand the monetary base until inflation is stable above the 2 percent target. “BOJ’s talk about increasing the amount of base money until inflation gets to 2 percent has seen the yen weaken off,” said Roger Bridges, the chief global strategist for interest rates and currencies in Sydney at Nikko Asset Management Co.’s Australian unit. “We need to wait a couple of days to see the wash-out to determine if the yen weakness will continue.”

In commodities, crude oil climbed as much as 2.5 percent to $45.14 a barrel ahead of a government update on U.S. stockpile levels. Inventories fell by 7.5 million barrels last week, the American Petroleum Institute was said to have reported late on Tuesday ahead of the official figures. Algeria’s energy minister said OPEC may turn its informal talks next week into a formal session, a hint that major producers may agree measures to limit output and support prices. “History suggests that OPEC action is unlikely, but there will be talk and that will move the market,” said Evan Lucas, a market strategist at IG Ltd. in Melbourne. “The API data gave the market a boost, but prices are coming from a low base.” Nickel fell 0.4 percent in London, after jumping 6 percent in the last two sessions, ahead of the results of a mining audit by the Philippines. It has climbed about 16 percent in 2016 as the Philippines — the biggest supplier of the mined metal — shutters sites for failing to meet environmental standards. The government could tell more mines to stop operating, Environment and Natural Resources Secretary Gina Lopez said on Monday.

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US Event Calendar

  • 7am: MBA Mortgage Applications, Sept. 16 (prior 4.2%)
  • 10:30am: DOE Energy Inventories
  • 2pm: FOMC Rate Decision (Upper Bound), est. 0.5% (prior 0.5%); (Lower Bound), est. 0.25% (prior 0.25%); Fed Summary of Economic Projections
  • 2:30pm: Yellen holds news conference after FOMC meeting

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities trade higher after BoJ stood pat on rates and pace of bond-buying but opted to tweak other parameters of its monetary policy
  • Despite initial upside in USD/JPY, the pair has trimmed some of its gains ahead of the FOMC with some also cynical about the latest stimulus efforts from the central bank
  • Looking ahead, highlights include DoE inventories and RBNZ and FOMC rate decisions
  • Treasuries rebounded from session lows after BOJ shifted the focus of its monetary stimulus from expanding the money supply to controlling interest rates; FOMC statement at 2pm, presser at 2:30pm, with Fed seen keeping rates unchanged, suggesting one increase by year-end.
  • BOJ will reduce investments in the Nikkei 225 Stock Average and buy more exchange-traded funds tracking the Topix index, following criticism its ETF buying is distorting the stock market
  • The BOJ’s shift of focus to control bond yields is fueling speculation that the nation’s investors will put more money into U.S. dollar assets as they chase higher returns
  • ECB has created a task force of national central bank staff to consider economic reforms, according to people familiar with the matter, who asked not to be identified because the initiative hasn’t been publicly announced
  • The BOE will cut interest rates close to zero later this year as concern persists about the longer-term impact of the Brexit vote, according to a survey
  • The U.K. should maintain EU regulations covering everything from working hours to chemicals until after the government sets out its plans for Brexit, said British manufacturers anxious to avoid a policy vacuum and safeguard access to their biggest export market
  • OPEC probably won’t clinch a deal to limit oil production in Algiers next week as members stay focused on either boosting output or defending their market share, according to a Bloomberg survey
  • Volkswagen AG investors filed lawsuits seeking a total of 8.2 billion euros ($9.2 billion) for losses stemming from the company’s emissions-cheating scandal

DB’s Jim Reid Concludes the overnight wrap

We’re straight to it this morning with the BoJ meeting outcome which annoyingly only came through just as we would normally be going to print. So here are our quick interpretations. The -0.10% policy rate has been left unchanged as generally expected, however the breaking news is the introduction of QQE with ‘yield curve control’. The BoJ has scrapped the average maturity targeting for JGB’s and has stated that it will buy JGB’s so ‘10y yields remain around the current level’. The statement also includes the passage that the ‘monetary base may fluctuate to achieve yield-curve control’ and that the BoJ is ‘committed to expanding the monetary base until CPI is stable above 2%’.

It’s early days and there is a lot of detail to sift through but these are the initial headlines and the main takeaway to us is a tweaking of QQE rather than outright further stimulus. We’ll have to wait and see what the full reaction is from markets in terms of whether or not it’s seen as disappointing but the price action so far has been supportive. The most interesting move so far has come in JGB’s with the 10y yield up 7bps and a shade below 0% at -0.007%, despite the statement talking about targeting 10y yields at the same level. They briefly traded in positive territory for the first time since March. 2y yields are 2bps higher and 30y yields are 4bps higher. The Yen is currently 0.60% weaker at 102.33 but it’s been pretty volatile. The Nikkei and Topix are up between 1% and 2%, led by the banks and insurers which are both up over 5% no doubt relieved that there is no interest rate cut and a steeper curve so far. The rest of Asia is firmer but gains are alot more modest. Gold (-0.30%) is the only notable mover in the commodity complex. All eyes on Kuroda’s press conference at 7.30BST.

So that’s one central bank (nearly) out the way but with one more to go today. The Fed is up next with the outcome due at 7pm BST and the post statement conference from Fed Chair Yellen to follow shortly after. A reminder that we’ll also get the updated dot plots and the latest summary of economic projections. With regards to the outcome, DB doesn’t expect the Fed to move this month, a view also shared by the wider market however the key might be just how hawkish the hold can sound. DB’s Peter Hooper expects the statement of risks to be upgraded to ‘nearly balanced’ from ‘have diminished’ – which would be a strong signal ahead of December – and that Yellen should indicate that there was an active discussion of a rate hike this time, but that they decided to hold for now because of mixed signals in both growth and inflation. Yellen will also have to acknowledge that a rate hike by the end of the year is a reasonable expectation if data comes in consistent with the committee’s expectations, but she will probably also do her best to focus as little as possible on ‘December’ specifically. On that note, it’s likely that a substantial majority of the dots will likely shift down to one 25bp rate hike this year (in June a significant majority were projecting at least two hikes this year). What might be interesting is how many remain above one hike this year and how many expect no hike at all. Peter expects at least two in the former and zero to three in the latter.

All that to look forward to later then. Unsurprisingly markets were treading water a bit again yesterday ahead of the two aforementioned big central bank meetings today. The S&P 500 (+0.03%) and Stoxx 600 (-0.08%) finished little changed after paring earlier gains. An announcement after the close from Microsoft that the board has approved a $40bn stock buyback and also a quarterly dividend increase, combined with better than expected earnings from FedEx has however helped US equity futures to nudge up modestly during the Asia session this morning. In commodity markets WTI Oil closed up +0.43% and is up another +1.82% this morning and so hovering close to $45/bbl again with another round of noisy headlines ahead of next week’s meeting playing its part. The latest twist is a suggestion from Algeria’s Energy Minister that the talks may end up being a formal discussion after all, with the Minister playing up the need for a reduction of 1m barrels a day to re-balance the market. Credit markets meanwhile were relatively unchanged in Europe but slightly wider in the US. CDS indices rolled yesterday to the new series so as you’ll see in the market data of today’s EMR we’ve left the intraday moves blank to avoid any confusion.

The most significant price action yesterday came in sovereign bond markets however where yields fell across the board and curves flattened ahead of the BoJ. More than anything this appeared to just reflect the market paring back recent steepening hopes, and that remains to be seen following the BoJ decision. 10y Bund yields were down 3.4bps on the day and back in negative territory once again at -0.021% having spent a total of 7 days trading north of zero. Led by the long end, Treasury yields were down a couple of basis points while the 5y 30y spread, which had widened for 11 days in succession, has now tightened for each of the last 3 sessions.

There wasn’t a huge amount to report on the data front. In the US housing starts in August were down more than expected (-5.8% mom vs. -1.7% expected) to an annualised rate of 1.14m from 1.21m with weakness seemingly coming from a big decline in the South (which accounts for the biggest region for building). Building permits (-0.4% mom vs. +1.8% expected) were also soft. The Atlanta Fed have chopped their Q3 GDP forecast again, with the 2.9% forecast down from 3.0% although that largely reflects last Friday’s CPI report.

Elsewhere it’s worth also highlighting the latest leg lower for Sterling below $1.30 following a -0.32% decline yesterday. A flurry of Brexit related news, all of which suggesting rising risks of a potential hard Brexit and also a prolonged and difficult negotiating period appears to be to blame. One story which stood out yesterday was the news that roughly 5,500 UK registered companies rely on passports to operate in other countries in the EU according to the Financial Conduct Authority. Another 8,000 businesses authorized in other EU states do business in the UK and so therefore also rely on the passport system. The FT noted that there are growing fears that the UK will lose passporting rights once it leaves the EU, however the numbers suggest that the EU would have much to lose from restricting access to the single market for the UK, so it looks to be an interesting back and forth debate.

Today’s diary is clearly dominated by the FOMC meeting outcome this evening at 7pm BST, followed half an hour later by Fed Chair Yellen’s speech. In terms of data it’s very quiet today with just the August public sector net borrowing data in the UK due to be released along with China’s leading economic index print this afternoon. Between now and the Fed however expect the focus to be on the post-BoJ reaction in markets for now.