It is very fitting that on today's April 28th anniversary of the bull market, the day that officially makes this the second-longest "bull market" in history, the market got a stark reminder of just how it got there: through constant and relentless central bank intervention, which has been "beneficial" to stocks for the most part, however last night was anything but.
Less than one week after the BOJ floated a trial balloon using Bloomberg, that it would reduce the rate it charged some banks which set off the biggest USDJPY rally since October 2014, we are back where we started following last night's "completely unexpected" (for everyone else: we wrote "What If The BOJ Disappoints Tonight: How To Trade It" hours before said "shock") shocking announcement out of the BOJ which did absolutely... nothing.
"It’s a total shock,” Nader Naeimi, Sydney- based head of dynamic markets at AMP Capital Investors told Bloomberg. "From currencies to equities to everything -- you can see the reaction in the markets. I can’t believe this. It’s very disappointing."
As we reported last night, the yen surged the most in 8 months, or since August’s market meltdown and Japanese equities plunged after the Bank of Japan refrained from adding to its monetary stimulus. Bonds jumped around the world and gold rallied as the Federal Reserve signaled no hurry to raise interest rates. The staggering move as seemingly everyone was caught wrong-footed is shown in the chart below.
As we warned readers in advance of the BOJ announcement, it all started with Goldman which one week before the BOJ announcement changed its "base case" for BOJ easing from June to April, expecting a doubling in ETF purchases, and immediately all the other sellside lemmings followed, assuing everyone would be flatfooted when the BOJ "disappointed." As Bloomberg puts it, "the BOJ’s decision was a surprise because a majority of economists surveyed by Bloomberg had predicted some action to counter a strengthening yen that had cast a shadow over the outlook for wage gains and investment spending. That the market’s reaction was so violent shows the weight financial markets are attaching to shifts in monetary policy."
The move confounded economists, a slight majority of whom had expected extra easing, and investors, who’d pushed the Topix index higher and the yen toward a one-month low in the hours before the decision.
The resulting screams of anger as the BOJ refuse to coddle spoiled "traders", pardon central bank frontrunners, was absolutely hilarious: “I’m very disappointed. I wanted the BOJ to do something and the BOJ should have done something," said Masaru Hamasaki, head of the investment information department at Amundi Japan Ltd. “Kuroda has created mostly positive surprises so far, but this time it’s negative. The BOJ hasn’t been on the same wavelength as markets this year."
There was more: "Todays market reaction is all about the BOJ,” said Ralf Zimmermann, a strategist at Bankhaus Lampe in Dusseldorf, Germany. "‘Investor expectations that had been built ahead of the meeting have now been scaled back. Earnings in a nutshell look OK, but as earnings estimates further down the road are still too high, there will be a negative trend in earnings revisions."
But wait, it gets even better: "Quite a few people have been wrong-footed by this," said Andrew Clarke, Hong Kong-based director of trading at Mirabaud Asia Ltd. “Guessing what governments do next at this moment in time is not a good way to play these markets. Hoping that there will be more stimulus will lead to disappointment, because hope isn’t a very good strategy."
Yes, hope is not a very good strategy, especially when you are betting it all on what an irrational central planner may or may not do.
Of course, Kuroda’s inaction doesn’t just matter to investors. Japan’s economy is struggling to break out of a funk, with consumer prices dropping in March by the most since 2013 and company profits getting hurt by the stronger yen. In refraining from adding to stimulus, officials are betting that their success in bringing down borrowing costs since unveiling a negative-rate policy in January will generate an acceleration in lending. Perhaps this is just Kuroda's way of saying Abenomics (and the BOJ's policies) have failed and it's time to pack it up?
And while Japan's troubling future just got even more nebulous, stocks around the world tumbled, with European and Asian stocks, and U.S. index futures all falling after the BOJ "shock." The drop is so big that not even last night's blowout earnings by Facebook appear to be able to make much of a dent.
The MSCI All-Country World Index dropped 0.2 percent. The Stoxx Europe 600 Index lost 1.3 percent, heading for its biggest decline since April 5 as almost all of its industry groups declined. Among the notable movers, we say Banco Bilbao Vizcaya Argentaria SA plunge 7.9 percent and Lloyds Banking Group Plc falling 2.4 percent after they reported earnings declines. Deutsche Bank AG was the exception, rising 3.8 percent, as it posted a surprise profit. Electrolux AB jumped 9.5 percent after Europe’s biggest maker of home appliances announced earnings that beat analysts’ estimates and raised its forecast for U.S. growth.
Futures on the Standard & Poor’s 500 Index slid 0.8 percent after the gauge rose for a second day, closing near its highest level of the year. In the premarket, Facebook Inc. climbed 8.4 percent after reporting sales and profit that topped projections. Medivation Inc. added 2.3 percent after Sanofi offered to buy it. The U.S. will release details of its first-quarter economic growth on Thursday.
Market Wrap
- S&P 500 futures down 0.8% to 2074
- Stoxx 600 down 1.2% to 344
- FTSE 100 down 1.1% to 6248
- DAX down 1.3% to 10165
- German 10Yr yield down 6bps to 0.23%
- Italian 10Yr yield down 5bps to 1.47%
- Spanish 10Yr yield down 3bps to 1.6%
- S&P GSCI Index up 0.2% to 356.7
- MSCI Asia Pacific down 0.3% to 131
- Nikkei 225 down 3.6% to 16666
- Hang Seng up 0.1% to 21388
- Shanghai Composite down 0.3% to 2946
- S&P/ASX 200 up 0.7% to 5225
- US 10-yr yield down 3bps to 1.82%
- Dollar Index down 0.67% to 93.75
- WTI Crude futures down less than 0.1% to $45.32
- Brent Futures up less than 0.1% to $47.22
- Gold spot up 1% to $1,258
- Silver spot up 0.8% to $17.38
Top Global News
- Facebook’s Zuckerberg Wants Right to Be Bold After Revenue Beat: Proposed new share class to give CEO more freedom for big bets; 1Q adj. EPS 77c vs est. 63c; 1Q rev. $5.38b vs est. $5.27b; Zuckerberg Borrows Google Tactic in Splitting Stock for Control
- Sanofi Pursues Medivation for $9.3 Billion After Being Spurned: Offers $52.50 per share in cash, a premium of >50% to the 2-month volume-weighted avg. price prior to takeover rumors
- BOJ Holds Off More Stimulus to Gauge Impact of Negative Rate: Keeps three key tools unchanged; majority forecast some action
- Deutsche Bank Profit Beats Estimates as Legal Costs Drop: 1Q net attributable EU214m vs EU544m y/y; est. loss EU484.3m; debt trading revenue falls less than analysts had expected; Cryan, Fitschen call financial markets outlook “uncertain”
- Texas Instruments Forecast Shows Rising Auto-Industry Demand: Sees 2Q rev. $3.07b-$3.33b, est. $3.17b; sees 2Q EPS 67c-77c, GAAP est. 71c; 1Q GAAP EPS 65c, est. 62c
- First Cash Said to Be in Advanced Merger Talks With Cash America: Discussing an all-stock merger of equals and an agreement could be announced as soon as this week
- Valeant’s ‘Mistakes’ Raised Profit, Destroyed Value, Ackman Says: Drugmaker’s price strategy reassessed at Washington hearing
- PayPal Goes Mobile to Lure Customers, Fend Off Competitors: 1Q net rev. $2.54b vs est. $2.50b, adj. pro forma EPS 37c, est. 35c
- Hanesbrands Offers $835 Million for Aussie Underwear Firm: Agreed to buy Australia’s Pacific Brands Ltd. for A$1.15 per share in cash, 22% more than the target’s closing price on Wed., gaining iconic underwear labels including Bonds and Jockey
- Marriott 1Q Adj. EPS, Rev. Beat; Starwood Deal ‘On Track’: 1Q adj. EPS 87c, est. 84c, 1Q rev. $3.77b, est. $3.71b
- VW’s Biggest Brand Stumbles to Loss on Emissions Crisis: VW brand posted a loss of EU127m in the final three months of 2015, compared with a profit of EU780m a yr earlier
- House Panel Approves $610.5B Defense Policy Bill For FY 2017: House Armed Services Committee approves the $610.5b defense authorization bill by a vote of 60-2
- Qlik Tech Said to Draw Bids From Thoma Bravo, Bain, Permira: First-round offers said submitted by Tuesday deadline
- Puerto Rico Risks Historic Default as Congress Chooses Inaction: Island may impose moratorium if GDB payment isn’t delayed
- Suncor Takes Majority Syncrude Stake After Murphy Oil Deal: Additionanal Syncrude stake will provide 17,500 barrels
- Monsanto Says New Technology to Help GMOs Fight Pest Resistance: Technique may allow GMO plants to beat weed, insect resistance
- DreamWorks Said to Explore Sale Advised by Centerview: Reuters
Looking at regional markets, Asian stocks trade mixed following a mild positive lead from Wall St. where an unsurprising FOMC and strength in oil provided early support, while Nikkei 225 slumped after the BoJ disappointed markets and kept monetary policy on hold. This saw a firm break below 17000 in the Nikkei 225 (-3.6%) with the index wiping out Industrial Production inspired gains. ASX 200 (+0.6%) benefited from the uptick in energy after WTI broke above USD 45/bbl to post another YTD high, while the Shanghai Comp (-0.3%) weakened amid ongoing poor earnings with state-owned CNPC the latest addition after its profits dropped over 50%. 10yr JGBs are relatively flat despite the slump in Japanese stocks as the BoJ's inaction kept fixed-income demand subdued.
Top Asian News
- China’s $1 Trillion Bond Leverage Unwinds as Pimco Senses Panic: Investors get squeezed as bond prices fall, repo rates rise
- Daiwa Securities Quarterly Profit Falls 45% on Trading Slump: Brokerage commissions and underwriting fees also drop
- Docomo Forecasts Jump in Profit as Phone Subsidy Ban Cuts Costs: To buy back up to 193b yen of shares from May 2 to Dec. 31
- Sony Reports Quarterly Loss, Holds Forecast to Assess Earthquake: 4Q net loss 88.3b yen vs 106.8b yen loss y/y
- ICBC Joins Bank of China in Breaching Bad-Loan Coverage Rule: Industrial & Commercial Bank of China breached a regulatory requirement for bad-loan coverage as it reported a 0.6% gain in 1Q profit
- Samsung Gets S7 Boost, Still Leaves Question of What’s Next: Latest smartphone model fuels gains in net income, sales; shares decline as analysts see few new hits on horizon; co. to uy back 2.03 trillion won worth of common and preferred shares
- Cnooc 1st Quarter Revenue Drops 31% After Crude Hits 12-Year Low: 1Q oil, gas revenue falls 30.7% y/y to 24.6b yuan
- India’s Tata Starts Tech Transformation With Yoga Wearables: Tata hopes to place technology at the heart of group strategy
- China Said to Mull Starting Trading of Credit-Default Swaps: NAFMII sought views on CDS and credit-linked notes, people say
European equities are broadly lower this morning as hopes of further stimulus had been shattered by the BoJ, after the central bank kept rates unchanged while also refraining from increasing the size of its asset purchase program. Alongside this, another bout of earnings have guided price action in Europe with IBEX the notable underperformer following a poor figures from BBVA. While the DAX saw a technical break below yesterday's low amid VW's annual conference, while weak regional German CPI's point towards a poor national reading, subsequently adding to the dampened tone. Bunds have been bolstered by the negative tone across the region, with yields across the curve falling after the BoJ's lack of action, coupled with signals from the FOMC that they are in no rush to tighten monetary policy. As such, CME FFR futures are now pricing in as much as 17% of a hike in June.
Top European News
- Lloyds Falls After Posting Decline in First-Quarter Revenue: Rev. fell 1% to GBP4.4b, lender cut operating costs 2% to offset revenue drop
- Anglo to Sell Niobium, Phosphate Business for $1.5 Billion: China Molybdenum agreed to buy the division and the transaction is expected to be completed in the second half of this year
- Euro-Area Economic Confidence Rebounded in April From 1-Year Low: Indicator rises to 103.9 in April from 103.0 in March, economists had forecast a gain to 103.4
- German Unemployment Extends Drop in Sign Economy Still Robust: Number of jobless fell for seventh straight month in April, unemployment rate remains at record low level of 6.2%
- Airbus Profit Falls on Delivery Delays as A400M Issues Brew: Earnings slump 23% after setbacks to A320Neo, A350 programs, said fresh problems with the troubled A400M transport plane could hurt future earnings.
- BBVA, CaixaBank Drop as First-Quarter Profit Miss Estimates: BBVA said net income fell 54% to EU709m, earnings were hit by lower trading revenue and currency fluctuations
- Telecom Italia Said to Target $1.1 Billion Cost Cuts by 2018: New CEO Cattaneo wants to double company’s prior savings goal
- WPP Sales Rise as U.S. Clients Spend More on Advertising: Forecast further increase this year, helped by the Summer Olympics in Rio and the U.S. presidential election
- Hermes Sales Buoyed by Bags After Boosting Leather Output: Sales of leather goods, saddles surges 15%, beating estimates
- TUI Agrees to $1.3 Billion Hotelbeds Sale to PE, Pension Funds: Price about 1.2 times 2015 rev. for online booking unit
In FX, In the wake of the FOMC statement last night, we see the market continue to pressure the USD, and focus is firmly on USD/JPY this morning after the heavy overnight losses based on the BoJ's on-hold call. Heavy spec positioning on hints of a move saw the lead spot rate hit by 3 JPY, but early London has only managed a modest dip under 108.00 since. EUR/USD has been pressed higher as a result, with EUR/JPY showing the familiar resilience at the lows, but only after suffering a near 4 JPY drop. Similar losses seen in the rest of the major cross rates, but AUD, CAD and NZD all still higher against the USD, as is GBP which is back testing recent highs through 1.4600. German regional inflation all generally softer, but widely expected, with the unemployment rate unchanged at 6.2%. EU sentiment indices on the soft side also, but industrial above expectations — all to minimal effect on the EUR. Oil still pushing higher as Jun WTI eyeing $45.50+. CAD well bid but pre 1.2500 orders contain for now. US Q1 GDP the main event this afternoon, with USD sales fading in the last hour or so as a result.
In commodities, WTI and Brent have benefited from the decline in the USD index as the Fed look to be in no rush to hike rates, WTI currently trading near the USD 45.00/bbl level with the next major resistance at the psychological level of USD 46.00/bbl level. Gold has also been rising off the back of safe haven flows into the asset following the central banks decisions and comments. Silver has also been rallying reaching the USD 17.35/oz level eyeing the recent highs of USD 17.67/oz. In base metals copper prices were subdued amid the dampened tone in China and on the hourly chart price is currently at the 38.2 fib support level and could look to move higher after rejecting it for a second time.
On the US calendar today the big focus is on the Q1 GDP report, while the core PCE reading will be released alongside (expected at +1.9% qoq). Initial jobless claims data and the Kansas City Fed’s manufacturing survey rounds off the data. It’s another busy day for earnings too with 63 S&P 500 companies set to report including Amazon, UPS and Ford Motor. In Europe the corporate reporting calendar is highlighted by the banks today.
Bulletin Headline Summary from RanSquawk and Bloomberg
- Global equities slump amid the surprising lack of action by the BoJ, alongside a slew of rather soft earnings updates from large European names.
- JPY benefits from the BoJ's action, coupled with the broad risk off tone in the region.
- Looking ahead, highlights include US Advance GDP, Unemployment Claims, German national Inflation figures alongside ECB's Linde and Costa.
- Treasuries rise during overnight trading with European and Asia sovereign bonds after the BOJ held off on more stimulus to take more time to assess the impact of negative rates, and the Fed showed no sign of June rate increase.
- Haruhiko Kuroda hasn’t lost his power to jolt markets: but now he’s moving them by doing nothing as the yen soared the most in eight months and stocks sank in Tokyo
- New Zealand’s central bank said it may need to cut interest rates further after holding them steady Thursday, as slowing global economic growth and a strong currency prolong a period of low inflation
- Sweden’s krona is moving in the wrong direction with the threat of a major appreciation putting economic growth forecasts at risk, according to Riksbank Deputy Governor Per Jansson
- Currency trading via CME Group Inc., ICAP Plc and Thomson Reuters Corp. fell to $538 billion per day last month, from more than $669 billion in September 2014, according to data compiled by Bloomberg, which shows the extent of the slump in a market that this month saw some banks report less client activity
- PetroChina Co. posted its first-ever quarterly loss as falling prices for global crude and domestic gas wiped out earnings; China’s biggest oil and gas producer reported a 13.8 billion yuan ($2.1 billion) loss in the three months ended March 31 from a 6.15 billion yuan profit a year ago; Cnooc Ltd., China’s biggest offshore oil and gas explorer, reported a 31 percent decline in revenue and an increase in output amid a crash in crude prices
- China is considering starting trading of credit-default swaps as the number of corporate nonpayments surges, according to people familiar with the matter
- Brexit campaigners sought to seize back the initiative in the referendum battle as eight high-profile economists declared Britain would do better outside the European Union.
- Daiwa Securities Group Inc. said it has almost completed a round of job cuts overseas as a trading slump contributed to a 45 percent decline in fourth-quarter profit
- Sovereign 10Y bond yields lower; European, Asian markets lower; U.S. equity-index futures fall. WTI crude oil lower, metals higher
US Event Calendar
- 8:30am: Initial Jobless Claims, April 23, est. 259k (prior 247k)
- 8:30am: GDP Annualized q/q, 1Q A, est. 0.6% (prior 1.4%)
- 9:45am: Bloomberg Consumer Comfort, April 24 (prior 42.9)
- 10am: Freddie Mac mortgage rates
- 10:30am: EIA natural-gas storage change
- 11:00am: Kansas City Fed Mfg Activity, April (prior -6)
DB's Jim Reid concludes the overnight wrap
It’s straight to Japan for us this morning where all eyes have been on the BoJ. Expectations had been growing in recent weeks that we might see some sort of further easing, a view also shared by a narrow majority of economists, however the big news is that BoJ has stayed put on all measures. That means annual asset purchases are unchanged at ¥80tn, the policy rate is to stay at -0.1% and the rate of ETF purchases is also unchanged. At the same time the BoJ has also pushed backed on its 2% inflation target, the fourth time in a year they have done so.
Pressure had only mounted leading into the meeting this morning after the BoJ reported lower than expected inflation data. Headline CPI was reported as dipping into negative territory at -0.1% yoy last month (vs. 0.0% expected), a fall of four-tenths. That’s the first deflation reading since 2013. Core inflation also slipped into negative territory at -0.3% yoy (vs. -0.2% expected), a drop of three tenths. The core core print (ex food and energy) was one-tenth lower at +0.7% yoy.
The most immediate impact to the BoJ decision was a huge rally in the Yen. Having hovered around 111.5 prior to the release, the currency surged over two big figures and broke through 109.0 (touching 108.77). It’s currently hovering around 109.3 which is a 2% rally on the day. Meanwhile Japanese equity markets have sharply reversed course. The Nikkei was up +1.41% prior to the decision, but sharply reversed to the tune of nearly 4.5% to trade at -2.96% as we go to print. It’s a similar story for the Topix which is currently -2.62%. Bourses elsewhere in Asia have given up earlier gains. The Shanghai Comp (-0.68%) and Kospi (-0.67%) are in the red post the news, while the Hang Seng (+0.50%) is up but has given up bigger gains from earlier in the session. 10y JGB yields are down 3bps.
The big focus now will be on Governor Kuroda who is scheduled to speak to the press shortly after this hits your emails at 7.30am BST. Given the massive adverse reaction from markets, this has arguably suddenly become the main event of the week where there will be huge attention placed on his every word.Needless to say yesterday was all about the other big central bank meeting of this week with the conclusion of the FOMC meeting. All-in-all the tone of the statement didn’t offer a whole lot of new information, with the Fed still very much in a wait and see mode. Those banging the tightening drum for June will probably be a little disappointed and while that door is still being left open, the lack of any real reaction in futures markets - with the probability hovering around 21% this morning - indicates that investors were little swayed by the outcome yesterday.
The main focus of the statement was on the reference to global risks. After previously saying that global economic and financial developments pose risks to their outlook, they replaced that with the line that the Fed ‘continues to monitor inflation indicators and global economic and financial developments’.
With regards to economic developments, Fed officials appeared more downbeat saying specifically that growth of economic activity ‘appears to have slowed’ which has coincided with a moderation in household spending. On the flip side the committee also made mention to households’ real income rising at a ‘solid rate’ and consumer sentiment also remaining high. Business fixed investment and net exports were acknowledged as being soft, while the usual positive rhetoric around the labour market was referenced with ‘a range of recent indicators, including strong job gains, points to additional strengthening of the labour market’. On the inflation front market-based measures of inflation compensation were reported as remaining low, while survey measures are little changed. For the third time in a row, the balance of risks statement was omitted.
So it feels like its back to the data-watch train to determine the path ahead for the Fed. On that note, today’s advance Q1 GDP figures released this afternoon will be of huge interest. The current consensus forecast is for +0.6% qoq, which is also the latest forecast of the Atlanta Fed. That consensus forecast has actually been trimmed from as high as +2.5% back in January. Our US economists are a little lower than the market at +0.5%. We’ll know the exact outcome at 1.30pm BST.
In terms of what happened in markets yesterday, prior to the FOMC the bulk of risk assets in the US had been trading in the red, led by weakness in the tech sector from the weak Apple led results hangover. As the session dragged on however and post-FOMC, markets bounced back into the close albeit finishing with still fairly modest gains. The S&P 500 ended up with a +0.16% gain despite Apple closing some 6% lower, while the Dow (+0.28%) closed up slightly more. The Nasdaq (-0.51%) did however fail to recover from the early leg lower. Some better than expected results out of Facebook late last night however (shares traded up as much as 7% in extended trading) did see US equity index futures and particularly the tech-heavy Nasdaq trade higher this morning, but those moves have been wiped out post the BoJ decision.
Supporting the rebound also was another impressive performance for the Oil complex. WTI closed above $45/bbl after rallying close to 3% to mark a fresh 2016 high. That was actually after what was a fairly volatile session which saw Oil drop some 3% off its early highs in the afternoon following a surprise jump in US crude stockpiles levels, before then climbing back into the close late in the session post FOMC. The US Dollar continued its theme of declining each day this week with the Dollar index ending -0.20%, while some of the bigger moves were reserved for the Treasury market. Having risen for seven consecutive sessions, 2y yields ended 4.4bps lower yesterday at 0.819%, while 10y yields finished close to 8bps lower at 1.852%, albeit still back to where they were mid-way through last week.
Yesterday’s main economic data of note was the March advance goods trade balance reading for the US. The data showed an unexpected shrinking of the deficit to $57bn from $63bn reflecting a sharp slowdown in imports, after expectations had been for little change. Meanwhile the latest housing market data was reserved for the March pending home sales numbers which were reported as rising +1.4% mom last month (vs. +0.5% expected).
Meanwhile closer to home yesterday there was a similar bounce off the early lows for risk assets in Europe yesterday with the Stoxx 600 and DAX ending with a +0.29% and +0.39% gain respectively. The main focus data wise was on the ECB’s money and credit aggregates numbers for March. The data was fairly unspectacular with M3 money supply growth up one-tenth to +5.0% yoy as expected, while the credit impulse shrank. Meanwhile we also got wind of a number of regional consumer confidence surveys, with Germany reporting a rise in confidence, while France was little changed and Italy reported a decrease. Finally the advance Q1 GDP reading for the UK printed as expected at +0.4% qoq.
Looking at the day ahead, the early focus this morning is on the UK where the April house price data is due. Shortly after that we’ll get the latest unemployment reading out of Germany, while later this afternoon the April CPI print in Germany will be closely watched. We’ll also get confidence indicators for the Euro area today. Over in the US this afternoon the big focus is on the aforementioned Q1 GDP report, while the core PCE reading will be released alongside (expected at +1.9% qoq). Initial jobless claims data and the Kansas City Fed’s manufacturing survey rounds off the data. It’s another busy day for earnings too with 63 S&P 500 companies set to report including Amazon, UPS and Ford Motor. In Europe the corporate reporting calendar is highlighted by the banks today.