12.06.2013 The Big Picture The drawback of fungible stimuli: With the integration of financial markets the world of finance has moved into a state with relatively easy capital flows that are fungible. Monetary stimuli in the form of quantitative easing have increased money supply and liquidity, transforming country-specific central bank actions into global market events. The Bank of Japan’s decision to not engage in further loosening of its monetary policy, by for instance prolonging the duration of loan operations, has led to a steep decline of more than 4% on the Nikkei whilst driving the yen higher, marking its greatest gain versus the dollar since the 2011 earthquake and tsunami. The lack of further fungible stimulus, however, impacted equities around the globe with the U.S. indices shedding 1% as they are coming into terms with a possible Fed tapering off that would lift the foot off the equities accelerator. The prospect of an initial tightening of the U.S. monetary policy through a $10 to $20 billion reduction in monthly asset purchases is expected to initiate deleveraging as the action’s impact is equivalent to a 25bp increase in the benchmark rate, affecting interest rate sensitive equities, which were the most hard-hit yesterday. The markets look confused at the moment, being swung by volatility, with the JP Morgan G7 Volatility Index increasing 2.8% yesterday lying close to a 1-year high, with the VIX spiking higher by 11%, demonstrating inherent volatility in U.S. equity options as well. Today sees the conclusion of the German constitutional court ruling on the legality of the ECB’s Outright Monetary Transactions. With the markets struggling to find direction it is likely that the news will have a bearing, with a surprise denouncement of the ECB’s actions leading most probably to euro weakness, likely causing a breakdown from resistance for EUR/USD. The pound will receive yet again traders’ attention with the publication of the U.K.’s May employment report. The ILO unemployment rate is expected to remain steady at 7.8% with the claimant count expected to decrease by 5k, a decrease from the 7.3k reduction in April, but still a seventh consecutive month of falling claims. The Eurozone figures for the day are the working days adjusted and seasonally adjusted industrial production for April, with both expected to contract. The former, a YoY figure, is expected to contract at a slower pace from -1.7% to -1.2%, and the latter, a MoM figure, is expected to relapse to contractionary territory, by shrinking by 0.2% when a 1% expansion was experienced in March. In the U.S., the weekly MBA mortgage applications are due, with markets eager to see whether there will be a fifth consecutive week of falling applications. The indicator does not carry a forecast. The monthly budget statement will also be issued, with forecasts exhibiting large standard deviations. Surveys indicate a median deficit ranging from 110B to 136.5B. Overnight sees the release of significant data. The Reserve Bank of New Zealand will make its interest rate decision, with none of the 15 economists surveyed forecasting a change from the current 2.5% benchmark rate. Moreover, the Japanese Ministry of Finance releases its weekly data of foreign capital flows, which may trigger more market movement than is usually the case given the volatility seen recently on the yen, the Nikkei and the Japanese government bonds. The BoJ Policy Board Member Sayuri Shirai is also expected to give a speech at a meeting with business leaders, which may serve as an opportunity to talk down the yen, reversing somewhat the market reaction triggered by the BoJ’s lack of further stimulus. Finally, Australia releases its employment report for May, with unemployment expected to increase from 5.5% to 5.6% as a reduction in the number of people employed is anticipated.
Posted on: Wed, 12 Jun 2013 06:35:52 +0000
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