Bank of Japan Takes Center Stage

Daily Analysis - 20/09/2016

Latest Monetary Policy Decision From BoJ Expected to Spur Higher Volatility

Financial markets around the globe remain cautious ahead of “Super Wednesday,” when both the U.S. Federal Reserve and the Bank of Japan will release the minutes of their respective monetary policy meets. While two major central banks meeting in the same week is frequent, announcement dates seldom clash, raising the possibility of outsized volatility following the decisions.

All Eyes on BOJ as Fed Expected to Hold

Although the Federal Reserve is usually the more closely watched Central Bank by financial market participants, with a building consensus that interest rates are likely to remain steady, the focus has firmly shifted to the Bank of Japan where the outcome is less certain. Analyst forecasts for the BoJ's next move vary widely. While a majority expect a rate cut deeper into negative territory, some say Governor Haruhiko Kuroda may instead decide to change the size and make-up of the Central Bank’s asset purchases program by “twisting” the maturities. Furthermore, the BoJ’s propensity to surprise financial markets has created further uncertainty, with most investors deciding to stay on the sidelines until the event has passed. US markets closed Monday flat, while those in Asia are marginally lower in early Tuesday trade as USDJPY continues to consolidate and move lower ahead of the announcement on policy.

US Home Builder Confidence at Decade Highs

Home builder confidence soared in September to be at par with its highest reading in a decade for the US according to data released late Monday. The National Association of Home Builders’ index surged 6 points to 65, easily topping economists’ expectations for a figure closer to 60. The NAHB index estimates builders’ assessment of present and future demand for new homes. The better than expected improvement in sentiment is reflective of the underlying market confidence amid the low mortgage rates. Following the confidence data, the US Commerce Department is set to report August housing starts data later in the session. The consensus is for a figure around 1.19 million, down slightly from the 1.21 million homes breaking ground recorded in July. Although S&P futures are trending slightly higher early in the European session, it marks a rebound from yesterday’s losses during the cash equity session.

China Staring at Financial Meltdown

China is edging towards a large scale financial meltdown that could wreak havoc across the globe according to a damning report from the world's central bank watchdog, the Bank for International Settlements. The BIS reckons that the pace of credit growth relative to the country’s GDP is of serious concern and could lead to widespread financial overheating and economic distress. The BIS said that any score above 10 is a cause for worry. China's gap stands at a massive 30.1 – much higher than that of the U.S. before the start of the 2008 crisis. This comes on the heels of surging home prices across China which has coincided with lower borrowing from businesses concerned about the outlook. In the meantime, Chinese Premier Li Keqiang has telegraphed to markets that the Yuan exchange rate will be kept “basically” stable ahead of meetings with US President Barack Obama in New York.

Saudi Pump Record Crude

Crude oil futures edged higher Monday amid speculation that a deal to put a cap on output was imminent. Nevertheless, prices are back on the retreat early Tuesday trade after Venezuelan Energy Minister Eulogio Del Pino said global supplies had to fall by 10.00% to bring parity between production and consumption. To further add to the gloom of supply glut, official data from leading OPEC member Saudi Arabia showed that crude exports increased in July as the world's largest oil exporter continued to pump record levels of crude. When combined with rising crude oil production from US producers and increased competition for market share, prices may not be as responsive to output freeze talks as production levels across the globe continue to rise despite some production outages in Nigeria and Libya.