Morning Briefing 8211 Mostly about Abe

Japan’s Prime Minister Shinzo Abe kicked off an even busier morning than is normally seen at the height of the US and European earnings season

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By :  ,  Financial Analyst
  • Japan’s Prime Minister Shinzo Abe kicked off an even busier morning than is normally seen at the height of the US and European earnings season. Abe, who was recently handed a strengthened mandate after his Liberal Democrat Party’s sweeping upper-house victory in Japan, has clearly had enough of speculation about his government’s widely trailed stimulus package. A stream of plausible but uncorroborated figures have been reported over the last few weeks and this has done little to bring some calm to trading in the yen. On Tuesday it even jumped the most since the Brexit vote. Quite the opposite effect the Ministry of Finance and the Bank of Japan, want to see.  (At this point expectations are swinging back to the BoJ going ahead and bringing fresh policy moves on Friday, with another 10 basis point cut of some rates and somewhat expanded ETF buying.)
  • Therefore PM Abe detailed a package of more than $265bn/¥28 trillion that would be officially compiled next week. However, it remains unclear how much will be spent to directly boost growth. Still, the size exceeds initial estimates of around 20 trillion yen and will be 6% bigger than Japan’s official economy. 13 trillion yen will consist of “fiscal measures,” which probably means spending by national and local governments, as well as loan programmes.
  • Either way, it might be that these official details have sealed the yen’s fate for now. It fell as much as 1.89 yen against the dollar to 106.53 per dollar, having been as strong as 104 earlier this week. So whilst doubts remain about the extent of Japan’s capability to stoke inflation and the technical details of the planned package, the news represents the biggest setback for yen bulls this year.
  • Given the yen’s role as a safe haven it follows that its travails should reflexively encourage more risk-seeking and that was evident as European trading got underway. At last check, despite a host of negative news points, once again from the region’s beleaguered banks sector, the STOXX 600 was 0.5% higher, the DAX shrugging off in-line but dire Deutsche Bank quarterly results was up 72 points, CAC 40 was charged by very strong Peugeot results (which boosted that stock 10%), and the FTSE 100 took the dollar baton and strolled 22 points or 0.3% firmer. US markets are promised a boost from stronger than expected Apple Q3 results, though these weren’t mega and still sharply lower year-to-year. Even STOXX’s bank sector index was able to eke out a 0.6% gain, despite DB, and possibly taking as positive news that UniCredit might dispose of a Polish unit as part of ongoing balance sheet clean-up, particularly ahead of Friday’s stress test results which many Italian banks will fail.
  • The dollar also partook of cheer, though most of that simply reflected the thrashing being meted out to the yen. The Dollar Index was still 60 odd ticks higher and 34 from 4-month highs at 97.64 hit on Monday. The dollar strength was also visible in sterling, which was having another off day, despite robust GDP figures: +0.6% quarter-quarter vs. +0.4% forecast and +2.2% annually against 2% expected. Cable was losing 30 pips and verging on loss of the 1.31 handle. Traders have decided to take into account that most of the strong economic readings we’ve seen since the Brexit vote actually preceded the referendum. We guess last week’s dire, post-23rd June PMIs have cleared some minds.
  • For further economic pointers, all eyes on the Fed at 7pm. However with no press conference don’t expect fireworks and policy changes are of course off the table.
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