Bank of Japan Disappoints Financial Markets

Daily Analysis - 29/07/2016

Japanese Central Bank Leaves Interest Rates on Hold and Adds to ETF Purchases

In a move that sent shockwave through the Yen, the Bank of Japan opted to add very little in the way of monetary stimulus in spite of pressure from the Government to be bolder in its actions. Interest rates remained stable at -0.10% while another JPY 6 trillion was added in annual ETF purchases and increased dollar-denominated lending to exporters in a bid to help boost business confidence.

Yen Climb Quickens

After hopes for a bigger and more aggressive monetary stimulus package were dashed by the latest Bank of Japan decision, the Yen continues its recent trend of strengthening, keeping the prevailing downtrend from the outset of the year intact. Although the Central Government under the stewardship of Prime Minister Shinzo Abe pressured the Central Bank to act more aggressively, the Bank of Japan refrained from dropping interest rates further, instead opting to focus on ETF purchases and lending to corporations to help spur the export economy. This decision comes on the heels of a more pronounced decline in household spending which fell by -2.20% on an annualized basis combined with the consumer price index which remained firmly in deflationary territory. The silver lining was a slight improvement in the unemployment rate and improved industrial production. EURJPY had fallen as much as 200 pips on the session, before rebounding modestly to 114.60.

Crude Crash Continues

Crude oil prices hit new multi-month lows overnight as the downward slump in prices accelerates as the unease about the state of oversupply resurfaces globally. Aside from inventory readings reported earlier in the week by the United States Department of Energy, data from Asia also confirmed that the heightened build in refined products in Singapore is adding to rapidly building storage concerns. West Texas Intermediate has continued its decline, falling below $41.00 per barrel overnight as higher US production and a rising number of drill rigs threaten to add to the ongoing glut and push inventories over the edge. Data due late in the session from oil servicing giant Baker Hughes could complicate the situation further, with any sustained increased in oil drill rigs conceivably contributing to rising supply with demand expected to fall the remainder of the year. Meanwhile, WTI futures remain under pressure at $40.89 per barrel.

German Inflation Pickup

Amid widespread concerns about the pace of inflation in the Euro Area, the latest data made available from the Federal Statistical Office Germany showed that German inflation picked up slightly during the month of July according to preliminary data. Monthly consumer prices rose by 0.30%, beating the prior periods 0.10% print while annualized headline inflation improved to 0.40%. The data coincides with other positive data on HICP inflation which is a Euro Area-wide measure for consistency in comparing the members of the Euro Area. Additionally, unemployment managed to stay at record lows of 6.10% with the number of unemployed falling by -7,000 during July. However, the state of progress for the aggregate region will visible later today with upcoming Euro Area inflation and unemployment figures alongside a preliminary second quarter GDP reading. The German DAX 30 finished Thursday’s session modestly higher, with the index trading slightly lower ahead of today’s reports.

Amazon Surges Past Earnings Estimates

In another blowout quarter for one of the globe’s largest companies, Amazon managed to surpass the earnings consensus estimate by a wide margin, reporting earnings per share of $1.78 versus expectations of $1.12. Much of the gains were attributed the high growth Amazon Web Services (AWS) division which saw its net income double in one year, with cloud revenue growing by 58.00% quarter over quarter. In another stunning move, the company raised its guidance, anticipating that third quarter revenue and would be growing 22.00-32.00% versus the same period a year earlier. This is significant considering that many of the world’s largest corporations are concerned about earnings growth that is expected to slide or go negative in the coming quarters as sentiment shifts lower. For Amazon, the news was well received by shareholders, with shares climbing 2.08% in after-hours trading to $768.25 per share, adding to the 2.16% session gains.