The Bank of Japan is discussing more ‘sustainable’ stimulus. Cue a higher yen and even lower risk appetite.
To an atmosphere already febrile from toxic trade relations and combative Tehran-Washington outbursts, add a possible BoJ stimulus re-think. What you get is upward yen pressure fuelled by both safety seeking and yield activation across JGBs, bunds, gilts and Treasurys. For equity investors, scoping out the week ahead including ECB event risk among others, these are good enough reasons to opt for the side lines and a light bias to sell. European shares see an extra downside tilt from sobering Fiat news as well as the lingering threat of new U.S. import duties on the group’s sector. Elsewhere, Glaxo break-up talk is too vague to offer much of a broader lift for pharma/consumer shares.
Dollar grind: off again
Inevitably, this also adds up to another ‘off’ phase in the dollar’s faulty upward trajectory. Simmering discord across many geopolitical fronts is likely to keep greenback progress episodic. CFTC data on speculative positioning showed residual net short interest that had clung on for weeks finally extinguished, but that may not be enough. Figure 1. shows realised USD/JPY volatility last week narrowly marked a two-month high and was the fourth highest weekly variance for the year. The yen’s haven characteristics will remain the chief challenge for the dollar for the foreseeable future though Japan monetary introspection could now also well create an even more pronounced stop-start feel for the greenback in the medium term.
Figure 1. – USD/JPY close-to-close weekly volatility 9.25 am, 23rd July 2018
Source: Thomson Reuters/City Index
Raab in Brussels again
For now, sterling is underpinned, though little more. Even with a relatively politics-free week ahead, Brexit Secretary Dominic Raab will meet EU Chief Negotiator Barnier on Thursday. The former has already proven willing to be far more transactional in stance to Brussels than his predecessor. This is anathema for nervy sterling markets. Aside from Brexit news flow, euro trading could be largely static ahead of Thursday’s ECB events. Still, the bank’s policymakers have already moved to splinter consensus over the lengthened horizon to tightening offered after at the last meeting. All in, there’s some possibility of another increment in the global move towards tighter policy in Thursday’s statement, with potential for hints beforehand. Single currency trading will be watchful ahead of Thursday.
Alphabet needs an ‘A’
Alphabet kicks off reporting by the largest U.S web giants this evening after wider equity sentiment conspicuously failed to respond to Microsoft’s strong earnings and revenue performance on Friday. Marginal deceleration in its flag ship cloud operations together with rapidly growing—though lower—revenue in key units like LinkedIn could be hardening attitudes amongst ‘growth’ seeking investors again. Valuations amongst the dominant consumer facing web groups are still frothy, suggesting a lower threshold of market tolerance given far less certain geopolitical underpinnings than during the last earnings seasons. Our best guess though is that scepticism remains only skin deep for now. Broader economic soundings are still resounding ebullient, despite uncertainty stoked by Washington. Alphabet costs will be a second-tier watch after earnings and revenues, given margin shrinkage last quarter. Alphabet, like peers is priced for something like perfection. Shortfalls will be punished.