Central Banks Dictate FX Moves while Stocks Rock

Tuesday January 23: Five things the markets are talking about

Global equities have found fresh impetus for another attempt at new record highs, as investor optimism has again surged amid corporate earnings and the end of the U.S government shutdown.

And this despite U.S President Trump imposing, thus far, selected tariffs (on solar panels and washing machines) to achieve his own ‘level’ playing field. Next step for investors is to see how markets will respond to Trumps selective protectionist policies.

The U.S dollar has found some traction against the EUR and GBP, along with U.S treasuries and gold. The outlier is JPY, which has rallied after the Bank of Japan (BoJ) dampened market speculation that Japanese policymakers are close to reducing monetary stimulation.

U.S government employees return to work after their three-day partial shutdown on Trumps signing of a temporary government-spending bill.

Note: Barring any last minute changes in Washington, President Trump is expected to join world leaders in Davos for the annual World Economic Forum.

1. Stocks ‘rock’

Equities probe fresh highs after U.S. government shutdown ends.

Fresh yen strength did nothing to deter Japanese stock investors, with the Nikkei closing above 24,000 for the first time since November 1991. At the close, the index was +1.3% higher.

Down-under, Aussie shares ended higher on Tuesday, snapping a five-session losing streak following Wall Street after U.S. senators struck a deal to end a three-day government shutdown. The S&P/ASX 200 index rallied +0.75%. In S. Korea, the Kospi added +1.4%.

In Hong Kong, stocks hit a fresh record, helped by Chinese money inflows. The Hang Seng index ended up +1.7%, while the China Enterprises index rallied +2.2%.

In China, banks and property firms powered China stocks to fresh two-year highs. At the close, the Shanghai Composite index was up +1.3% while the blue-chip CSI300 index was up +1.08%.

In Europe, Germany’s DAX index has hit an all-time peak, and France’s CAC is heading for its highest close in 12-years.

U.S stocks are set to open in the black (+0.2%).

Indices: Stoxx600 +0.3% at 403.4, FTSE +0.3% at 7730, DAX +0.8% at 13576, CAC-40 +0.1% at 5550, IBEX-35 +0.4% at 10625, FTSE MIB +0.3% at 23952, SMI +0.6% at 9583, S&P 500 Futures +0.2%

2. Oil supported by economic growth

Oil prices are on the march again, lifted by healthy economic growth as well as the ongoing supply curtailments by OPEC and Russia.

Brent crude futures are at +$69.38 a barrel, up +35c or +0.5% from Monday’s close, not far off their three-year high of +$70.37 reached on Jan. 15. U.S West Texas Intermediate (WTI) crude futures CLc1 is at +$63.93 a barrel, up +36c, or +0.6% from their last settlement. WTI rose to its highest since December 2014 on Jan. 16 at +$64.89.

Traders said oil markets were generally well supported by healthy economic growth.

Note: The International Monetary Fund (IMF) on Monday revised upward its forecast for world economic growth in 2018 and 2019, to +3.9% for both 2018 and 2019, a +0.2% point increase from its last update in October.

Gold prices have edged up overnight as the U.S dollar hovers atop of its three-year lows, with a surge in global equities capping further gains. Spot gold has rallied +0.2% to +$1,336.26 per ounce, up for a third straight session.

3. Sovereign yields fall after BoJ decision

Global bond yields have edged down overnight after the BoJ played down speculation that it was close to ending its stimulus, raising hopes that the European Central Bank (ECB) may follow suit Thursday.

The BoJ kept its policy steady, as expected and left Interest Rates on Excess Reserves (IOER) unchanged at -0.10%, while maintaining its policy framework of “QQE with Yield Control” around 0.00% and asset purchases at annual pace of ¥80T.

The vote to keep policy steady was again 8 to 1. There were no surprises that Kataoka issued his “dovish” dissent for a fourth consecutive meeting and called for further JGB purchases so that bond yields of maturities of 10-year+ fall broadly.

Note: The bond markets have been hit in recent weeks by growing talk that central banks in Japan and Europe could end monetary stimulus sooner rather than later.

The ECB meets on Thursday against a backdrop of heightened speculation over when it will end its QE program and signal a rise in interest rates from record lows.

The yield on 10-year Treasuries have fallen -3 bps to +2.62%, the biggest tumble in almost four-weeks, while in Germany, the 10-year Bund yield has declined -2 bps to +0.55%, the lowest in almost two weeks.

4. Dollar sits atop of three-year lows

The USD is a tad firmer against a number of currencies, aside from JPY, as political developments helped to support the greenback. The U.S Senate helped to pass legislation to fund the government until Feb. 8th.

The U.S dollar has dipped -0.33% to ¥110.55 after the BoJ maintained its short-term interest rate target at -0.1% and a pledge to guide 10-year government bond yields around zero percent. Governor Kuroda also said, “inflation expectations have moved sideways recently,” offering a slightly more upbeat view than three-months ago when he said they were on a “weak” note.

The EUR (€1,2255) continues to hover in yesterday’s range as the market showed little enthusiasm to Sunday’s German coalition developments in its effort to forge together a grand coalition. Market focus will now switch to the ECB’s rate decision on Thursday for hints on forward guidance.

Bitcoin (BTC) was down -4.5% on the Bitstamp exchange at +$10,320.13 following news that S. Korea will ban the use of anonymous bank accounts in cryptocurrency trading from Jan. 30.

5. German ZEW survey handily beats expectations

Data this morning showed that German economic sentiment rose in January and that investors remained optimistic about Germany’s near-term growth prospects despite the country’s struggle to form a governing coalition.

The ZEW headline measure of economic expectations rose +3 points to 20.4, beating market forecasts of 17.5 points.

Digging deeper, financial analysts and investors polled were also more upbeat about Germany’s current situation and the corresponding ZEW measure hit its highest level in 26-years.

The survey shows that Europe’s largest economy continues to prosper despite its difficulties forming a governing coalition.

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