Stock markets still seem unwilling to rise on strong earnings or take much heart from renewed stimulus.
BoJ’s gift to ‘risk’
The Bank of Japan’s inadvertent gift to the markets was to trigger the yen traded against the dollar’s second widest hourly range in July, with a bias to the downside. It follows the central bank merely tweaking policy and reaffirming rates would stay lower for a while longer. After the BoJ’s false dawn earlier this month, subsequent redoubled efforts to target the longer end of the curve made it almost impossible for the outcome of Tuesday’s meeting to be anything but an essential continuation of easy money. Various face-savers included acknowledgement that long-term rates may fluctuate requiring correspondingly more flexible bond-buying than before. This will amount to a 0.2 percentage point leeway around the bank’s 0% long-term yield target.
Looking at 50-odd pip slide by the yen, the Nikkei index’s swing higher and JGB yields pulling back 3 basis points (bp), market participants gave most weight to the short-term rate target staying put at -0.1% and 10-year yields around zero. The boost to easier monetary conditions was immediately transmitted via European bonds and Treasurys with yields on 10-year German bunds and French OATs down 3bp-4bp and on those on Treasury counterparts seeing a 4.3bp sell-off at their most intense. This relief is not a trivial matter following days of battered risk appetite. But can riskier markets make the most of the gift? The jury is out. For one thing, Treasurys subsequently retook about half of their yield loss. For another, investors continue to sell shares of companies with disappointing earnings harder than they’re buying those of groups deemed to have performed well.
Small BP boost, Lufthansa flies
Standard Chartered and Centrica were the among the latest in the first category, whilst Credit Suisse, and BP were in the second. The British oil major saw a particularly tardy boost despite net profits five times higher than in Q2 in the year before, helped by higher production, 50%-lower costs, a confirmed dividend increase and a $700m decline in net debt quarter-on-quarter. Clearly, investors recall that even post dividend hike, BP’s yield is well below 2016’s. Plus, much uncertainty remains as to whether BP can wrench more efficiency out of operations and if oil prices will behave sufficiently. BP needs a ‘yes’ to both questions to bring the targeted net income increases that can lift pay outs back toward peak. Lufthansa shares were one exception of outsize reward after its pleasing results. The stock traded 8% higher at last look after higher ticket prices enabled it to raise revenue. Even here, fortune played more of a part than efficiency. The flag carrier was stepping into the long-haul gap left by Air Berlin’s collapse. There will be no bottom line benefit. A positive read across for the sector should therefore become more discriminative later, suggesting little lasting boost overall.
Peaking valuations with little commensurate uplift in earnings outcomes help explain the higher bar to reward investors have imposed so far in the earnings season and why simulative events like the BoJ tweak have had only a moderate effect. The pattern has been epitomised by reactions to pretty much all the pivotal U.S. technology firms within the FANGMAN grouping – Facebook, Amazon, Netflix, Google, Microsoft, Apple and NVIDIA. Among those that have already reported, only Microsoft shares avoided slippage in the next main trading session. This again underlines that investors are using wider criteria to decide whether to stay fully invested. With the technology-focused Nasdaq index down for a third session on Monday, stakes for the biggest release in the sector are high. Apple earnings out tonight will go a long way to deciding stock market direction for the remainder of the week and beyond.
PCE inflation on deck
The finer gauge of inflation favoured by the Federal Reserve is the remaining economic release markets will acknowledge in the run up to Wednesday’s Fed announcements. With no press conference or economic projections planned with the FOMC meeting and little-to-no chance that rates will be changed, the Personal Consumption Expenditure releases could even turn out to be more pivotal for the dollar. Core monthly PCE could be the most sensitive reading. It will be the most up to date assessment of inflation and was forecast to inch back a tenth of a percentage point to 0.1% growth in June.
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