Daily Kickstart (BoJ Recap Edition)

“European stocks climbed to their highest in almost a year, while bonds and gold fell, demonstrating markets’ increasing resilience to geopolitical shocks,” Bloomberg wrote this morning, echoing sentiments I expressed overnight about the extent to which risk assets now seem immune to geopolitics, even as investors overwhelming say 2017 is likely to be the year of the geopolitical black swan.

“Markets have showed increasing immunity to terror incidents this year, with initial knee-jerk reactions to buy haven assets after attacks fading quickly,” Bloomberg continues, adding that “with trading volumes decreasing before December holidays and year-end, investors may be loath to veer too far from the underlying market trends that have prevailed since the election of Donald Trump in November, namely favoring stocks and shunning bonds.”

“The market response to each new terror event is less and less pronounced,” said Mike van Dulken, head of research at Accendo Markets. The move in European stocks “confirms ever-thickening investor skin.”

Yes, the “ever-thickening [of] investors’ skin,” and the “ever-thickening” of investors’ brains as everyone seems to think Trump’s fiscal stimulus package will ultimately “trump” all other concerns.

Meanwhile, the Nikkei rose as the yen plunged after the BoJ kept rates and stimulus on hold. Here are the headlines:

Kuroda presser summary (via Bloomberg):

  • Yen level is similar to February
  • FX market reflects strong dollar not weak yen
  • Not making any specific comments on FX levels
  • Is most appropriate to continue current policy for now
  • Appropriate yield curve has been achieved
  • Prices are still far from inflation target
  • Economy starting gradual expansion
    • BOJ is far from its price target
    • Will continue to conduct bond operations appropriately
    • Link to related story: Kuroda: Yen Not Excessively Weak Now, Yield Curve Is Appropriate
    • Kuroda goes on to say:
      • BOJ is targeting 10-year yields at “about 0%”
      • It’s meaningless to try to discuss what “about 0%” is
      • Amount of bond buying depends on the shape of the yield curve
      • Will work so that JGB holdings increase at about 80 trillion yen

And from Mizuho (also via Bloomberg):

It appears that the BOJ will leave its policy framework unchanged for a period of time, and thus UST-JGB yield spread will widen further, which will be negative to JPY, says Ken Cheung, Asian FX strategist at Mizuho Bank. “The upward revision in economic outlook also signals less need to do ease further,” says Cheung

Finally, the overnight wrap from Deutsche:

Sadly our final recap of the year is tainted by the sombre events in Germany, Turkey and Switzerland yesterday. The news of the assassination of Russia’s ambassador in Ankara came as Turkey and Russia were striving to rebuild their relationship over the conflict in Syria however the incident will now have the potential to reignite tensions again in the region. Meanwhile in Germany investigations are underway after a truck drove into a number of innocent bystanders at a Christmas market in Berlin. In Zurich three men have also been seriously injured following a shooting in an Islamic centre near the city’s main station. These events come after geopolitical concerns were already coming back into the spotlight following the seizure of a US drone in the South China Sea last week.

The biggest impact in markets from the events was in FX where the Turkish Lira (-0.75%) in particular underperformed, along with a number of other EM currencies. The MSCI EM equity index also closed -0.62% and so declining for the fourth consecutive session. In developed markets the feeling was generally cautious but resilient. The Stoxx 600 (-0.12%) closed a touch lower while the S&P 500 (+0.20%) edged slightly higher although unsurprisingly on seasonally thin trading volumes. The most interesting price action continues to be in sovereign bond markets. 10y Bund yields closed 6.9bps lower yesterday at 0.241% and have now moved up or down by at least 3.3bps for each of the last six sessions. 10y Treasury yields also dipped 5.3bps lower to close at 2.539%. While there was some suggestion that the moves reflected safe haven flows it appears that the blame was more last minute position clearing into year-end than anything else.

Before we go any further, this morning in Asia the focus has turned over to the BoJ meeting outcome. As expected there were no last minute holiday season surprises with the various policy measures all kept as is. Significantly, that also means that the BoJ will continue with its yield curve control policy which means targeting 10y JGB yields around zero percent. Where the BoJ was a bit more upbeat however was on its assessment of the economy. The BoJ now expects Japan’s economy to “turn to a moderate expansion” following a pickup in exports, improved domestic demand and business sentiment. Inflation forecasts are however expected to continue to be benign while the BoJ also pointed towards the risks to the outlook as including developments in EM and commodity exporting economics, developments in the US economy, Brexit and geopolitical risks. Governor Kuroda is scheduled to speak just after we go to print.

The Yen has weakened -0.40% following that while Japanese equity markets have rebounded following early modest losses. The Nikkei and Topix are currently +0.46% and +0.14% respectively. 10y JGB yields are also 0.6bps lower at 0.061% after touching a high of 0.090% last week. As we’ve highlighted a few times, it’ll be interesting to see how much the yield cap gets tested by the market next year. Elsewhere in Asia it’s a bit more mixed. The Hang Seng (-0.32%) and Shanghai Comp (-0.52%) are both in the red although the Kospi (+0.23%) and ASX (+0.43%) have both edged higher. US equity index futures are little changed meanwhile along with Gold and most of the commodity complex.

Moving on. The Italian banking sector was also back in the spotlight again yesterday following the news that the Italian government has asked Parliament to authorise up to €20bn through increasing public debt to rescue the nation’s ailing banks. Expect this story to rumble on today.

Elsewhere, Fed Chair Yellen also spoke yesterday at the University of Baltimore. However, as we were expecting there wasn’t a huge amount of new information. Speaking primarily on the labour market, Yellen said that “after years of a slow economic recovery, you are entering the strongest job market in nearly a decade” and that “there are also indicators that wage growth is picking up, and weekly earnings for younger workers have made strong gains over the past couple of years”.

There was also a bit of data to highlight yesterday. In the US we got the flash services PMI for December which came in weaker than expected at 53.4 (vs. 55.2 expected and 54.6 in the month prior). Combined with the manufacturing print from last week, that leaves the flash composite reading at 53.7 which is down 1.2pts from November. Elsewhere, in Germany the December IFO business climate index printed at 111.0 (vs. 110.6 expected) which is up 0.6pts from last month. The current assessment reading was reported as rising 1pt to 116.6 while the expectations component was little changed around 105.6.

Looking at the day ahead, this morning in Europe we’re kicking off in Germany where the November PPI data will be released followed thereafter by the UK’s CBI distributive trends survey for this month. There’s no data due out in the US although later this afternoon we are due to get China’s Conference Board leading economic index for November. It’s fairly quiet away from the data too although it’ll be worth keeping an eye on events in the UK where PM Theresa May is due to be questioned by the House of Commons Liaison Committee about her plans for leaving the EU, amongst other things.


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