Japanese central bank reappears on the monetary radar, Nikkei and the S&P at new highs

Market Review

Yesterday’s session started off with a sell off in equities as the Federal Reserve revealed a more hawkish stance towards rate increases, with Kocherlakota the sole dissenter in an otherwise Hawkish Fed. In addition to the repercussions of the FOMC statement, poor CPI numbers out of Germany showed that the central European power may be struggling more than consensus would have already priced in. As equities were on the back foot we felt that market participants had forgotten that the ECB is closer now than it ever has been to commencing on a quantitative easing program, and a slowing Germany would only add to the possibility of this happening. Furthermore, the data in the afternoon from the United States showed the seventh week in a row with a number below 300k on initial jobless claims, as well as the first of three GDP readings in the US showing a 3.5% expansion versus the expected 3%. The S&P was in an upward trend in to the evening session and bonds, although up on the day, were selling off after hitting both the entry and first target on the strategy.

Today's Fundamental View

The last seven years of trading has arguably been some of the most fascinating in history regarding the monetary policy environment. Central banks have been increasing their balance sheets in a way that is unparalleled throughout history in an effort to save the world's financial markets. As the largest one of them all is now closing in on a normalisation period we started seeing the end of this unequaled time, with the potential exception of the ECB which has been working on their own stimulus program. This is yet to get a go ahead from Mario Draghi and his board as they are currently collating the results of their current measures. The Japanese central bank had largely disappeared from our monetary radar until it emerged overnight with a fresh batch of stimulus, adding to its already heavy bond purchases. Kuroda announced that purchases in the region of Y80 trillion, versus the previous Y60-70 trillion, in an effort designed to fight Japans continuing fear of deflation. The move is adding to the already positive sentiment in stock indices around the world, and both the Nikkei and the S&P have made new all time highs. Although we were already positive on risk assets, this adds to the bullish outlook. As there has been a healthy discussion where the majority have been calling for a sell off, I have stood firm with long strategies on the back of generally good US data sets and decent earnings reports. I am for this reason very happy about the latest market developments, and content to be able to say I told you so; equities are heading higher. Although at some point there will be a sell off of some variety, and with an increased likelihood in 2015 as we move closer to Janet Yellen’s rate hike. Until that happens I am of firm belief that the bears should be in winter hibernation after witnessing the latest stimulus package from the BoJ as well as being pushed back in to the cave by good US jobs numbers as well as an overall convincing earnings season. Today’s market should follow the same movement we have witnessed overnight, and is likely to see new highs in equities, whilst all other assets on the report is set for further sell offs.

Alternative View

Traders should remain wary and informed of any geo-political risk events that may develop as the day progresses.