FTSE grinds higher, yen stalls

Following a seventh straight week of gains, the FTSE closed last week above the 6900 level for the first time since May 2015. On a weekly basis, the FTSE stepped into the overbought market for the first time in more than three years. Low August volumes could amplify a downside correction, yet the mid-term trend in UK stocks should remain positive above the 6600, August support.

Despite the greyish clouds threatening the UK's economic activity post-Brexit, a looser monetary policy from the Bank of England (BoE), lower bank rates and a weaker sterling vindicate the appetite in relatively high-yielding UK stocks.

Persimmon (+1.87%) is among the leading gainers in London as JP Morgan said the UK's homebuilders wouldn't disappoint on 2016 earnings.

Energy and miners extend gains as the barrel of WTI tests $45. Royal Dutch Shell (+0.30%), BP (+0.12%).

Weak growth failed to trigger sell-off in yen

The sentiment in Asia was hit by anaemic growth figures from Japan. Japanese gross domestic product (GDP) grew at a disappointing annualised pace of 0.2% in Q2, versus 0.7% anticipated by analysts and down from 1.9% printed previously. Capital expenditure (CAPEX) retreated by 0.4%, while external demand chopped 0.3% off the second quarter GDP, as the stronger yen combined with the gloomy global growth continued weighing on Japanese exports. This is the fourth consecutive quarter that the economic activity in Japan has been negatively impacted by the external component.

The USDJPY holds its ground above the 101 mark, but the enthusiasm around the macroeconomic figures remained limited in Tokyo. The weak data failed to revive speculations that a combined fiscal-monetary action could help cheapening the yen. In fact, the recently announced fiscal and monetary stimulus measures were clearly insufficient to satiate the market's appetite. The bulk of investors expect to hear more measures from the government and Bank of Japan (BoJ) to boost growth. The problem is that neither the BoJ, nor Shinzo Abe's government have much left in their pockets to satisfy the unappeasable hunger for free liquidity.

In fact, the maneuver margin tightens on both monetary and fiscal sides. The BoJ's decision to concentrate its focus on ETF purchases, rather than expanding its sovereign bond portfolio, did not please the BoJ-doves. Yet after giving it a deeper thought, we believe that further flexibility and greater diversity in the BoJ's balance sheet composition is the only way to enlarge the scope for monetary loosening in Japan. Therefore, the 100 level is still seen as a reasonable support for a mid-term recovery towards 103.25, the 50-day moving average and the major 38.2% retracement on July decline, before 105.80, the 100-day moving average.

The downside risks in USDJPY prevail however, as the market is heavily long yen. Last week's CFTF report showed that the net long speculative positions in the yen rose to a month high. In additional, the option markets hint at a solid, active hedging against further appreciation in the yen. The put options in dollar-yen dominate below the 100 level, suggesting that a slide below 100 could not see an esteemed support from the derivatives market.