The trading floors in Asia are alive with the sound of key technical levels breaking in various assets. This can often happen when we have two of the world’s most influential central banks meeting to discuss policy in a 12 hour period, amid an uncertain cloud of political events, that will heavily influence the future monetary policy settings of these institutions.
Whether its gold trading through $1300, AUD/JPY trading to the lowest levels since 2012, USD/JPY the lowest levels since September 2014, or the Australia 10-Year treasury breaking through 2%, there’s something in there for everyone. We can talk about the Japanese debt markets, but another day of record low bond yields are almost a given for this market. The phenomenon here is strength continues to breed strength and weakness begets weakness in certain markets and what has worked of late continues to work in earnest. This is a momentum based market, pure and simple.
The Fed are clearly cautious of the event risk in the June to July window and one can simply point to the fact Janet Yellen mentioned the word ‘uncertain’ 11 times during her press conference. However, the holy trinity for Fed watchers remains the outcome of the UK referendum, moves in inflation expectations and the 8 July US payrolls. A smooth transition is obviously not assured, but hypothetically if we can navigate this murky patch then the Fed can potentially raise rates. The Fed have brought themselves closer to the market, if we focus on their projections for the fed funds rate, but if we look at the long-run neutral rate the market is still a whole 154 basis points below the estimate of the Fed and some participants are clearly positioning for recessionary type conditions in the years ahead. This is a fate Larry Summers has suggested on a number of occasions is on the cards.
Asian markets were generally building downside momentum into the Bank of Japan meeting, which considering the dovish re-alignment in various Fed officials stance shows a new type of concern from investors. A more dovish Fed is not the positive it once was and investors are saying ‘if the Fed are worried then perhaps we should be as well’. The ASX 200 for example got off to a lively start testing 5200 before traders waded in and faded the move. 17,900 Australian jobs created in May won’t change the RBA’s stance, given they were all part-time and the Australian central bank join the Fed in happily holding policy as is until the event risk provides answers, which locally includes Q2 CPI (27th July). Depending on the outcome of these events and we could see a further rate cut in August.
The Bank of Japan also left policy unchanged again today, also putting themselves in the ‘wait and see’ camp and subsequently directing a wave of capital into the JPY and out of Japanese equities. US and oil futures took a modest hit on the back of moves in Japan and in turn our European index calls have dropped somewhat and the bears have firm control. The Bank of Japan are in a pickle and more than most will be really hoping that the UK don’t vote to ‘leave’ or USD/JPY will be trading below ¥100 and they will have to do something amazingly punchy just to stabilise assets. On the other hand, even if the UK vote to ‘remain’ and risk assets undergo some sort of relief rally domestic inflation expectations shouldn’t pick up greatly and they may need to ease in this scenario anyhow. One suspects that we will head into the July BoJ meeting with expectations of additional JGB and ETF purchases sky high. The next two weeks promises to be very interesting indeed.