Thursday, 27 April 2017
The Bank of Japan kept monetary policy unchanged on Thursday and offered its most optimistic assessment of the economy in nine years, signaling its confidence that a pick-up in overseas demand will help sustain an export-driven recovery.
But the central bank slightly cut its inflation forecast for this fiscal year in a quarterly review of its projections, suggesting that it will maintain its massive monetary stimulus for the time being to achieve its ambitious 2 percent target.
At a post-meeting news conference due 0630 GMT, BOJ Governor Haruhiko Kuroda is likely to remind markets the Japanese central bank is nowhere near an exit from its massive stimulus, analysts say.
"The inflation and growth projections, as well as the upgrade of its economic assessment, were all in line with market forecasts, so there was no surprise at this meeting," said Yasunari Ueno, chief market economist at Mizuho Securities.
"As long as the economy maintains its momentum, the BOJ will likely stand pat at least until next spring, when Kuroda serves out his term."
In a widely expected move, the BOJ maintained its short-term interest rate target at minus 0.1 percent and a pledge to guide 10-year government bond yields around zero percent.
"Japan's economy has been turning toward a moderate expansion," the BOJ said a quarterly review of its long-term economic and price projections, compared with the previous month's view that it was "improving moderately as a trend."
It was the first time since March 2008 the BOJ used the word "expansion" in describing the state of the economy, signaling its conviction that the recovery was gaining momentum and that it sees no need for additional stimulus.
In the quarterly review, the BOJ cut its core consumer inflation forecast for the year ending in March 2018 to 1.4 percent from 1.5 percent, blaming stubbornly weak services and durable goods prices.
The BOJ also complained that public perceptions of future price rises remained weak with no clear signs of a pick-up.
But it maintained its projection that inflation will reach 2 percent during the fiscal year ending in March 2019 on the view that a tightening job market would gradually push up wages.
Many analysts remain doubtful inflation will accelerate as quickly as the BOJ projects, with slow wage growth keeping households from boosting spending.
"Consumer price growth is around zero, which makes all of these price forecasts look overly optimistic," said Shuji Tonouchi, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.
"The BOJ upgraded its economic assessment, but this is due more to overseas demand. Japan's labor market is tight, but retailers still want to cut prices."
Japan's economy has shown signs of life, as exports rose the most in over two years in March and manufacturers' confidence hit the highest since the global financial crisis a decade ago.
But core consumer prices for February rose just 0.2 percent from a year earlier, as weak private consumption has discouraged companies from raising prices.
While a pioneer in deploying unorthodox stimulus, the BOJ is likely to lag behind its peers in withdrawing monetary support.
The U.S. Federal Reserve is already embarking on interest rate hikes, while the European Central Bank may send a small signal in June towards reducing stimulus.
Most analysts polled by Reuters expect the BOJ's next move to be a tightening of monetary policy, though many do not expect it to happen until next year at the earliest.
After more than three years of huge asset purchases failed to accelerate inflation, the BOJ revamped its policy framework last September to one aimed at capping long-term interest rates.
Reference: Leika Kihara
The dollar edged higher against the yen on Wednesday, while the euro held firm near a 5-1/2 month high due to receding concerns about the risks posed by the French presidential election.
The dollar rose 0.3 percent to 111.38 yen, pulling further away from a five-month low of 108.13 yen set on April 17.
Improving risk sentiment on reduced concerns over the French presidential elections helped weigh on the yen.
In a sign of the global bullish sentiment, the Nasdaq Composite hit a record high on Tuesday, while the Dow Jones Industrial Average and S&P 500 brushed against recent peaks, bolstered by strong corporate earnings.
Still, it remains to be see whether the dollar will see a sustained push higher against the yen, said Teppei Ino, analyst for Bank of Tokyo-Mitsubishi UFJ in Singapore.
"It's too early to say that the dollar will keep trending higher and head above the peak it saw in March," Ino said, referring to the dollar's March 10 high of 115.51 yen.
The focus will be on forthcoming U.S. economic data, especially after a softening in some recent indicators, he added.
The Trump administration's plans for tax reforms are another focal point for markets.
U.S. officials said late on Tuesday that President Donald Trump is proposing to slash the corporate income tax rate and offer multinational businesses a steep tax break on overseas profits brought into the United States.
Analysts said, however, that there was still uncertainty over just how quickly such fiscal policies would be implemented.
"Just presenting the plan doesn't mean the plan is going to be passed," said Mitul Kotecha, head of Asia macro strategy for Barclays.
"The reality is any tax changes or tax reforms or tax cuts, may not take place for some time, and Congress at this point is far from being agreed on what shape or form they are going to take," he added.
The euro edged up 0.2 percent to $1.0945. It touched a high of $1.0950, matching a 5-1/2 month high that was struck on Tuesday as the market digested centrist candidate Emmanuel Macron's victory in the first round of France's presidential election on Sunday.
In addition, three sources close to the European central Bank's Governing Council told Reuters that with the fading of the threat of a run-off between two eurosceptic candidates in France, and with the economy on its best run in years, many rate setters see scope for sending a small signal in June towards reducing monetary stimulus.
The Australian dollar was last down 0.2 percent at $0.7524, after underwhelming Australian inflation figures supported expectations of a benign interest rate outlook for months to come.
Reference: Masayuki Kitano
Wednesday, 26 April 2017
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.5 percent, hovering near their highest since June 2015. Stock markets in Japan and Australia led gainers.
European markets were pointing higher in opening trades with index futures up between 0.05 and 0.1 percent.
"We are carrying on the momentum from the overnight rally in the U.S. markets and financials are in the spotlight on expectations of good earnings," said Alex Wong, a fund manager at Ample Capital Ltd in Hong Kong, with about $130 million under management.
The outlook for Asian markets is looking favourable with the MSCI Asia ex-Japan index having broken above a technical level, suggesting more room for gains.
A strong finish to U.S. markets was the main driver for Asia. The Nasdaq Composite hit a record high on Tuesday, while the Dow and S&P 500 brushed against recent peaks as strong earnings underscored the health of corporate America.
Fanning the market's rally were reports that President Donald Trump's tax reform proposals, due to be announced on Wednesday, would include a slashing of the corporate tax rate and lower taxes on offshore earnings stockpiled by U.S. companies overseas.
The threat of a U.S. government shutdown this weekend also receded after Trump backed away from demanding Congress include funding for his planned border wall with Mexico in a spending bill.
Financials led the Hong Kong stock market higher as fund managers bet on expectations the quality of banks' balance sheets will likely get better on an improving economic cycle and cheaper valuations.
In Hong Kong, for example, the financial sector trades at a forward price-to-earnings ratio of 8.7 times compared with traditional market darlings of technology stocks at 29 times, according to Thomson Reuters data.
In currency markets, the euro built on strong gains posted this week after business-friendly centrist Emmanuel Macron won the first round of the French vote on Sunday and opinion polls indicated less support for the eurosceptic Marine Le Pen.
While that is not expected to sway the European Central Bank into further action at Thursday's meeting, policymakers see scope for sending a small signal in June towards reducing monetary stimulus, according to sources, another factor underpinning the single currency.
"In our view, downside risks to growth have actually decreased with the outcome of the first round of the French election...the underlying tone of the press conference should still be positive," Holger Sandte, a strategist at Nordea markets wrote in a note.
The euro was steady at $1.09480, retaining most of Monday's 1.3 percent gain. On Monday it posted its strongest one-day performance in 10-1/2 months, which lifted the common currency to a 5-1/2-month high.
Growing appetite for risk meant safe-haven assets fell out of favour, with U.S. 10-year Treasury yields firming to 2.34 percent from 2.23 percent on Friday.
U.S. crude futures slipped after a volatile overnight session following an industry report showing a surprise build-up in inventories. U.S. crude futures were down 0.3 percent at $49.41 a barrel.
Reference: Saikat Chatterjee
Investors' enthusiasm for Asian stocks is waning as a raft of political and economic risks takes the shine off the best first-quarter returns in 26 years.
That period of strong gains could put Asian equities in the firing line for a sell-off, as funds investing in the region play it a lot safer than they were a few months ago on concerns that economic and business cycles may have peaked.
"Most of the positive news may be priced in already. But at the same time, if we’re seeing disappointments, this could be a trigger for more profit taking," said Tuan Huynh, Asia Pacific chief investment officer at Deutsche Bank Wealth Management, who now recommends an underweight exposure to Asian equities from overweight at the start of 2017.
“Earnings season in the U.S. and political events like elections in Europe may bring negative surprises that could lead to corrections," he said.
The MSCI Asia ex-Japan index, returned 12.8 percent in the first three months of 2017, the best first-quarter performance since 1991, as almost $17 billion of funds flowed into the region, excluding China and Malaysia.
But they've returned a pittance since then, and flows slowed to only $563 million in April through the 19th, according to Thomson Reuters data, as risks grew, including nuclear threats from North Korea, a series of elections in Europe and delays in fiscal stimulus and protectionist rhetoric from the United States.
Business activity in Asia, which had been above trend and improving in the second half of 2016 and earlier this year, is now above trend but decelerating, Goldman Sachs' Chief Asia Pacific Equity Strategist Timothy Moe said in a podcast this month.
Over the last 15 years, average three-month returns in a period of above-trend improving activity have been 7.9 percent for the MSCI Asia Pacific ex-Japan index earn, while returns have fallen to 1.5 percent in above-trend decelerating phases.
"We're going from a period of really juicy, good returns to a period where returns will be positive but decidedly more muted in magnitude," he said.
The modest acceleration in global expansion and inflation expected in 2017 and 2018 is also not enough to return trade growth to pre-global financial crisis levels, according to Schroders.
Cyclical upswings in China and the United States, which have helped trade, are likely to fade soon, Keith Wade, chief economist and strategist at the investment house, wrote in a note this month.
"Without the support of these two economies, global trade is likely to roll over (slow), at least in value terms, in the second half of 2017," he added. "The implication is that this will take emerging market equities with it."
Still, investors aren't bailing out of Asia entirely, even though stocks are the most expensive relative to other emerging markets since February 2015. That is because they are still cheaper than developed markets, and earnings growth is finally materializing after years of disappointments.
Analysts expect earnings across the region to jump 17 percent this year from 2016.
"For that earnings trajectory to roll over, you'd have to see a breakdown in global reflation. It's not our base case," said John Woods, Asia Pacific Chief Investment Officer at Credit Suisse Private Banking and Wealth Management.
"We're reasonably comfortable that this earnings story can continue for a year or so."
However, if earnings do disappoint or expectations are downgraded -- possibilities many investors are dismissing -- that could be another catalyst for a sell-off.
For those buying, selectivity is key. Deutsche's Huynh and M&G Investments' Matthew Vaight prefer North Asia, specifically South Korea and Taiwan, which, along with being the cheapest in the region, also benefit from global growth.
Vaight, emerging markets portfolio manager at M&G, is underweight India, the region's most expensive market, and also finds Indonesia and the Philippines overvalued.
India, which received the most inflows from foreign investors in the first quarter, is trading at 21.2 times earnings, compared with the cheapest, South Korea, at 12.1.
Investors appear split on China. While Goldman is overweight, on expectations that improving economic growth will filter through to earnings and that stability will be a priority ahead of the 19th National Congress in October, M&G cites concerns about Chinese banks.
"They are tools of state policy and poor allocators of capital," Vaight said. The high valuations of many "new" China stocks, such as internet companies, are also difficult to justify, he said.
Reference: Nichola Saminather
Tuesday, 25 April 2017
The euro steadied on Tuesday, pausing after a rally sparked by the first-round results of the French presidential election, while the Canadian dollar fell after the U.S. slapped duties on Canadian softwood lumber.
The euro last traded at $1.0866, off Monday's peak of around $1.0940, its highest level since Nov. 10, after centrist Emmanuel Macron won the first round of the French presidential elections.
Polls show Macron defeating anti-EU, anti-euro nationalist Marine Le Pen in a runoff vote due to take place next month.
The euro's sharp bounce on Monday was partly due to the triggering of stop-loss buying at $1.09, said Tan Teck Leng, forex analyst for UBS Wealth Management in Singapore.
After that rally, lingering caution over the risk of a surprise win by Le Pen in the runoff vote will probably limit the euro's gains for now, he said.
"Our view on the euro/dollar is that between now and May 7, you'll probably be trading between $1.08 and $1.10," Tan said.
Opinion polls indicate that the business-friendly Macron, who has never held elected office, will take at least 61 percent of the vote against Le Pen after two defeated rivals pledged to back him to thwart her eurosceptic, anti-immigrant platform.
The Canadian dollar fell 0.4 percent after U.S. Commerce Secretary Wilbur Ross said his agency will impose new anti-subsidy duties averaging 20 percent on Canadian softwood lumber imports.
The loonie slipped to C$1.3560 per U.S. dollar at one point, its lowest level since late December when it sank to C$1.3598.
The U.S. dollar rose 0.3 percent to 110.08 yen, as the safe haven yen edged lower.
There was little market reaction after media reports said North Korea put on a massive live-fire drill on Tuesday.
Market participants have been worried that North Korea could conduct its sixth nuclear test, or another long-range missile launch, to coincide with the 85th anniversary of the foundation of its army on Tuesday.
Analysts said there was some relief for now, over the lack of such action by North Korea.
They added, however, that concerns over geopolitical risks were likely to persist, limiting the yen's declines and tempering the dollar's gains against the Japanese currency.
"For the dollar to make a try for 112 yen, you'd like to see some type of positive news out of the United States and an easing in North Korea related tensions," said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.
One potential negative against the dollar is the risk of a U.S. government shutdown, Okagawa said.
President Donald Trump indicated an openness on Monday to delaying his push to secure funds for his promised border wall with Mexico, potentially eliminating a sticking point as lawmakers worked to avoid a looming shutdown of the federal government.
Trump is facing a Friday deadline for Congress to pass a spending bill funding the government through September or risk marking his 100th day in office on Saturday with a government shutdown.
Reference: Masayuki Kitano
Britain's top share index jumped on Monday as banking stocks surged after centrist Emmanuel Macron came out on top in the first round of France's presidential election.
The blue chip FTSE 100 .FTSE index rose 1.9 percent to 7,246.34 points by 0857 GMT, on track for its biggest one-day jump since early December 2016 and outpacing the mid caps .FTMC which were up 0.9 percent at a fresh record high.
French centrist candidate Emmanuel Macron won the first round of voting, qualifying for a May 7 runoff alongside far-right leader Marine Le Pen.
This quelled market worries about a potential anti-establishment shock in light of the UK's Brexit vote last June and Donald's Trump's election in the U.S.
"There’s the upside... and that’s a pro-European stance which Macron has campaigned on and that’s going to be something that also cheers the markets. It delivers some potential upside in terms of what it could mean for Europe going forward,” Dean Turner, economist at UBS Wealth Management, said.
UK banks jumped 2.4 percent, joining in with a broader risk-on rally among European lenders .SX7P, which surged 4 percent. Shares in Barclays rose nearly 5 percent, while Standard Chartered was up 3.4 percent and Royal Bank of Scotland gained 2.8 percent.
"It's the pro-growth backdrop that we're now starting to see come through rather than ... ongoing austerity which is providing quite a significant shift with the outlook for the European banks, in particular with the French banks very much leading the way, which of course sees their UK-listed counterparts rally quite significantly today as well," Dafydd Davies, partner at Charles Hanover Investments, said.
Shares in home improvement firm Kingfisher were also among the biggest gainers, rising 3.7 percent.
In March, Kingfisher warned that the impact from the Brexit vote and potential disruption from the French election could hit trade in its two main markets. France accounted for 38 percent of Kingfisher's sales in 2016.
Precious metals miners Randgold Resources and Fresnillo were among a handful of stocks in negative territory, falling 4 percent and 2.1 percent respectively as investors rotated out of more defensive safe-haven stocks.
Energy provider Centrica was the biggest FTSE faller, down 5 percent, while pee also dropped 3.2 percent after Prime Minister Theresa May's Conservative Party vowed to cap domestic prices if it retains power in an election in June.
Outside of the blue chips, shares in Kennedy Wilson Real Estate jumped 13.6 percent, while Computecenter gained 7.6 percent after an upbeat outlook.
Reference: Kit Rees
Monday, 24 April 2017
The euro briefly vaulted to five-month peaks on Monday after the market's favoured candidate won through the first round of the French election, reducing the risk of a Brexit-like shock and sparking a mass unwinding of safe-haven trades.
E-mini futures for the S&P 500 climbed 0.8 percent in early trade, while yields on 10-year U.S. Treasury notes rose almost 8 basis points to 2.31 percent.
Japan's Nikkei .N225 jumped 1.3 percent as the yen retreated, while MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS edged up 0.2 percent.
Shanghai shares .SSEC, however, fell 1.5 percent after state media signalled Beijing would tolerate more market volatility as regulators clamp down on riskier financing.
In France, Centrist Emmanuel Macron took a big step toward the presidency on Sunday by winning the first round of voting and qualifying for the May 7 runoff alongside far-right leader Marine Le Pen.
The outcome lessens the risk of an anti-establishment shock on the scale of Britain's vote to quit the European Union with Macron widely tipped to win the final vote and keep France in the union.
Opinion polls put Macron ahead by over 20 points, a lead so large that a repeat of the Brexit surprise seemed highly unlikely.
Investors had feared for the single currency's future if one of the far-left candidates had gotten through to fight Le Pen. The euro jumped in relief, and was last up 1.1 percent at $1.0845, having been as far as $1.0940, the highest since early November.
The safe-haven yen slipped across the board with the euro surging 2 percent to 119.32 yen while the U.S. dollar gained 0.9 percent to 109.99 yen. Likewise, gold fell 0.7 percent to $1,274.70 an ounce .
"The rise of the euro and risk appetite rebounding is understandable and this should also see yields in Europe fall, spreads to Bunds tighten and stocks rally," said Tim Riddell, an analyst at Westpac.
"However, such gains are likely to be contained when markets reflect upon the marked shift away from the "establishment" and just how effective the new president may be," he added.
SCEPTICAL ON TAX
Wall Street on Friday had only a modest lift from news President Donald Trump would announce the broad outline of his proposed tax package on Wednesday.
"Markets are sceptical that the real details will be forthcoming," said analysts at ANZ in a note.
"There is also plenty of conjecture about whether any tax cuts will be able to be revenue neutral, and that could affect their ease of passage through Congress."
The Dow .DJI ended Friday down a minor 0.15 percent, while the S&P 500 .SPX lost 0.30 percent and the Nasdaq .IXIC fell 0.11 percent.
Investors were also keeping a wary eye on tensions in the Korean peninsula.
North Korea said on Sunday it was ready to sink a U.S. aircraft carrier to demonstrate its military might, in the latest sign of rising tension as Trump prepared to call the leaders of China and Japan.
South Korea responded by asking Washington about holding joint drills with the USS Carl Vinson aircraft carrier strike group as it approaches waters off the Korean peninsula.
Oil prices recouped just a little of last week's hefty losses, still weighed by signs U.S. production and inventory growth were offsetting OPEC's attempts to reduce the global crude glut.
Brent futures were up 29 cents at $52.25 a barrel, while U.S. crude futures added 24 cents to $49.86.