Monday, September 23, 2019

Wall Street has mixed feelings about the trade war; Bank of Japan likely to introduce additional quantitative easing in October

  • China
  • Dollar
  • Gold
  • Yen
  • Euro

Market recap: Safe haven assets rise, indices tumble as Chinese agriculture officials cancel farm visits

Wall Street ended in the red on Friday, as investors reacted to news that Chinese agriculture officials have cancelled October visits to US farms in Montana and Nebraska. The DJIA ended 0.59% lower, the S&P 500 dropped 0.49% while the Nasdaq fell 0.80%. US futures, though, jumped during the weekend after US and China officials indicated recent talks regarding trade war tariffs had been constructive. Next up are the planned high-level discussions scheduled for early October. The E-mini S&P 500 Index Futures rose 0.43%, the Mini DJIA Futures climbed 0.41%, and the E-mini Nasdaq Futures increased 0.51% on Monday morning.

Safe haven assets jumped Friday amid rising trade concerns, with gold spiking as much as 0.94% on Friday and the Dollar Index reaching 98.61. The yen rose against the dollar, surging 0.04%. US Treasuries ended higher on Friday, with two-year yields falling to 1.68%, 10-year yields dropping to 1.72% and 30-year yields decreasing to 2.16%.

Today’s analysis: Bank of Japan likely to introduce additional quantitative easing in next policy meeting

The Bank of Japan (BoJ) announced on September 19th it will keep rates unchanged at -0.1%. The BoJ’s monetary policy meeting minutes states its domestic economy is expanding moderately, while acknowledging rising geopolitical risks and the current global economic slowdown. The minutes also state that the bank is willing to take additional easing measures, if there is an increased possibility of a slowdown, to achieve its inflation target of 2%. It is adopting a wait and see approach as a result of global uncertainty surrounding the US China trade dispute and Brexit negotiations, as well as the scheduled increase in consumption tax from 8% to 10% on October 1st.

The Japanese yen (JPY) however, is not only affected by the economic outlook of Japan, but also by demand levels for safe haven assets. In the past year, USD/JPY has been extremely volatile thanks to rising risks (such as the US China trade dispute, Brexit, and the recent drone attack on a Saudi oil facility), and has fluctuated between 112’s and 106’s levels to date this year.

Turbulent USD/JPY throughout 2019

The Japanese economy has surprised investors this year, as GDP growth beat estimates in the first and second quarter, increasing at an annualised rate of 2.2% in Q1 and 1.3% in Q2. Japan’s manufacturing PMI fell to 49.3 while services PMI increased to 53.3. Private consumption for Q2 increased by 0.6%, which was well within market expectations. The inflation rate for August also fell short of the expected level of 0.6%, coming in at 0.3%, while the core inflation rate (excluding food prices) remained flat at 0.5%. Exports for August fell 8.2% year-on-year in August, due to reduced shipments of chip-making machinery to China and other parts of Asia (which is likely because of the ongoing trade war and a reduce in demand for semiconductors). Imports fell sharply by 12%, indicating a potential slowdown in domestic demand.

Japan economic data releases

BoJ Governor Haruhiko Kuroda’s speech is scheduled for 9.35am on Tuesday, September 24th (GMT +4) and is likely to hint towards the outcome of the next monetary policy meeting on October 31st. Despite Japan’s strong GDP, the BoJ is likely to introduce further quantitative easing, as consumer demand will probably fall once Japan’s consumption tax is hiked on October 1st. The tax, which will likely see inflation move closer to the BoJ’s target rate, will definitely affect consumer demand. What’s more, additional easing will be needed in order to support the economy as global risk increases (China’s economy is showing signs of slowing, there’s still the possibility of a long-term trade dispute between the US and China, plus there’s the potential of short-term increases in oil prices). This will cause the JPY to strengthen, in turn reducing demand for exports.

As additional quantitative easing is likely to fall within analysts’ expectations, JPY is unlikely to be driven by the BoJ’s decision, but is more likely to be influenced by the economic outlook of BoJ officials during the meeting. Finally, the JPY is expected to react strongly to trade war developments as seen over the weekend, when it rose against the dollar after China’s officials cancelled those planned visit to US farms after trade tariff talks.