Wild swings in Yen – FTSE 100 makes fresh record high

Three things are moving financial markets this week: central banks, earnings and M&A. As we end the week, the yen is tumbling, stocks are climbing in Europe, and Treasury yields are retreating. Risk sentiment is back on after strong earnings from Microsoft and Alphabet have restored confidence that the AI boom will pay off. However, the key outperformer is the FTSE 100, which made a fresh intra-day record high on Friday and is benefitting from some upbeat earnings even though Anglo American has rejected BHPs takeover offer.

BoJ not worried about Yen

The main focus on Friday is the Bank of Japan, they kept policy unchanged as expected, and Governor Ueda gave no hint that interest rate hikes are imminent. He was less hawkish than some expected, but what was most extraordinary about today’s meeting was that Ueda said that the yen was not his goal, and the weak currency was not having a major impact on inflation, although that may change in the future. For now, the BOJ’s monetary policy will not change, and they will continue to purchase JGB’s on a monthly basis, although it was hinted that these purchases will be decreased.

Anyone who was looking for more dramatic actions from the BOJ will have been disappointed by this meeting. However, the economic data supported the BOJ’s cautious move. The headline Tokyo CPI rate for April fell to 1.8%, down from 2.6% in March. The core rate fell to 1.8% from 2.9% in March. Tokyo CPI tends to be a good lead indicator for the national inflation data, which suggests that the disinflation trend is gathering pace in Japan. This also supports the BOJ’s decision to remain on pause, but it has caused the yen to tank at the end of the week. The yen is weakest of all the major currencies this week and it is the only currency to have fallen vs. the USD, and is lower by 1%. USD/JPY is currently back above 156.00, and although there has been some volatility, it does not look like any official intervention to stem the yen’s decline is coming soon. Interestingly, there has been deeper yen weakness so far this week vs. the Aussie dollar, the pound and the euro, which have all gained more than 2% vs. the yen this week, as the dollar takes a breather. Interestingly, one month volatility in GBP/JPY is actually retreating and we may see it fall further, as the risks of official intervention to support the yen begins to recede. This does not mean that the yen will recover, but it does mean that the decline could be in a more orderly fashion, with less big swings in the coming weeks.

FTSE 100 has its moment in the sun

Elsewhere, the FTSE 100 is having its moment in the limelight and has set a new fresh record intra-day high at 8,106. All eyes is whether it can sustain this level to close the week off on a record high, if it can, then this would be a bullish signal for the UK index. Currently it is on track to be the best performing European index this week, and it is also likely to put in a better performance than the US indices. The question now is, can the FTSE 100 play catch up?

Why the FTSE 100 may see further upside

We think that there is a psychological shift going on in the mind of international investors, and they are starting to warm to UK stocks. There is a dual boom going on in the global economy right now: AI/ tech and commodities. The UK index may be light on tech, but it has a lot of exposure to miners and energy companies. Copper hit $10,000 a tonne on Friday, and commodities have had a strong run so far this year. Oil is higher by 15% YTD, while copper is also up by 15%. Commodity prices are likely to remain elevated for some time. This could lead to more analyst earnings upgrades for the UK, and this may signal a continued strong flow of dividends in the future, which also makes the UK index attractive. The average EPS estimate for the FTSE 100 in one and two years has been revised higher by 5% and 6% respectively, but there could be room for further upgrades as the UK economy recovers and UK companies have had a strong Q1 earnings season so far. Thus, this could be the beginning for the FTSE 100’s long-awaited comeback.

Fundamentals improve for the FTSE 100

The FTSE 100 also has good market breadth, with 73 risers and only 25 decliners on the day. This suggests that the rally is broad based. Also, valuations don’t look stretched the upside, with 68% of the FTSE 100 above their 200-day moving averages, this is lower than the 84% of the Euro Stoxx 50 members that are above their 200-day moving averages, and 78% of the FTSE MIB in Italy. This is also supportive of potential further upside in the FTSE 100 in the medium term.