Daily Market Digest: Yen falls on stimulus hopes. UK gets a new PM

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Market headlines

  • Japanese yen weakens after Abe pledges fiscal stimulus
  • The S&P500 hit an all-time high yesterday as US earnings season starts
  • UK Conservative party leader Theresa May to be sworn in as Britain’s Prime Minister on Wednesday
  • EU cuts Eurozone & UK GDP forecasts for 2017

Today’s Economic events

  • UK BRC retail sales monitor y/y -0.50% vs. 0.50% previously
  • Japan PPI y/y -4.20% vs. -4.10%
  • Australia NAB business confidence 6 vs. 3 previously
  • FOMC Member Mester speech
  • Japan tertiary industry activity m/m -0.70% vs. -0.70%
  • Germany final CPI m/m 0.10% vs. 0.10%
  • Germany wholesale price index m/m 0.60% vs. 0.30%
  • BoE releases FPC meeting minutes
  • China FDI ytd/y 5.10% vs. 3.80% previously
  • BoE Gov. Carney speech
  • US NFIB small business index 94.5 s. 94.1

Coming Up

  • FOMC member Tarullo speech
  • FFOMC member Bullard speech
  • The US wholesale inventories

FX Market Performance

FX Market Performance (12GMT, 12/07/2016)
FX Market Performance (12GMT, 12/07/2016)

Asian markets rally on Abe’s promise of fiscal stimulus

A day after winning the upper house elections, Japan’s Prime Minister, Shinzo Abe said that he would order a fresh round of fiscal stimulus in order to shore up spending and boost consumer prices. Japanese stocks were seen trading higher on Tokyo’s stock exchange on Tuesday as the yen eased strongly helping to lift the Nikkei average to a 3-week high above 16,000. The Nikkei225 closed 2.46% higher closing at 16,095 a first since June 23rd Brexit referendum.

Calling the election verdict “an endorsement of Abenomics” Abe pledged to expand spending despite Japan’s soaring public debt. Speaking at a news conference at his LDP’s headquarters in Tokyo, Abe said “the nation has given me a powerful mandate to further accelerate Abenomics. I am grateful for this.” The PM also said that his government would take advantage of the BoJ’s negative interest rate policy by issuing more bonds under the government loans and investment plans.

Meanwhile, rumor mills are running full steam ahead after BoJ Governor Kuroda met with former Fed Chairman Ben Bernanke on Monday. The BoJ did not comment on the substance of the talks, but the markets speculate that the BoJ could be looking at another monetary policy expansion when it meets later in July.

In his opening remarks at the closely watched meeting with former Fed Chairman Ben Bernanke, Japan PM Shinzo Abe told Bernake wanted to “accelerate the velocity” of the economy in its escape from more than a decade of deflation.

US Markets Close, 11/07/2016
US Markets Close, 11/07/2016 (Source: CNBC.com)

The US equity markets also extended their bullish rally. The S&P500 closed at an all-time high of 2137 yesterday while the Dow Jones Industrial Average closed with gains of 0.44% to close at 18226.

Brexit clouds clear as Theresa May to be the next PM

The British pound closed yesterday recording a 0.36% gain across the board, fuelled by a weaker yen as risk aversion faded. The gains came as the UK’s conservative party contender Andrea Leadsom pulled out of the race. Theresa May, who already enjoys a majority support within her party, is slated to become Britain’s second female Prime Minister on Wednesday.

Ms. May said that she would give more control to Britons over their lives, saying “we are going to give people more control over their lives and that’s how together we will build a better Britain.” She maintained “Brexit means Brexit” clearly putting to rest any speculation of a back door entry or calling for fresh Brexit referendum. It is likely that with the new PM being sworn in on Wednesday, the UK-EU negotiations are likely to move full steam ahead, subject to the UK invoking Article 50.

EU finance ministers, at the Eurogroup meeting in Brussels, maintained their view that the prolonged uncertainty over the EU’s relationship with Britain would have negative economic and financial impact on the region. Pierre Moscovici, economic affairs commissioner of the EU, said on Monday that “the U.K. leave vote has surprised markets, and economic uncertainty has increased significantly since then. Longer the uncertainty lasts, the costlier it will be for the economy.”

According to Moscovici, the European Commission’s preliminary analysis showed that Brexit would cut eurozone GDP growth by 0.20% to 0.50% by 2017 while hitting Britain’s GDP by one percent point to 2.50% by 2017.

The Bank of England also released the minutes from the financial policy committee where the FPC unanimously decided to cut the counter cyclical capital buffer requirements to 0 percent. BoE Governor Mark Carney was quizzed by MP’s on the Brexit fall out. He said that UK consumers were in a better position than they were in the run-up to the crisis saying consumers were less-indebted, and thus household debt posed a smaller risk to financial stability. The British pound was seen making gains this morning continuing to rally towards the $1.32 handle. Further upside is expected on a breakout above $1.32 in which case the British pound could be seen extending gains to $1.34. The Bank of England meets on Thursday where expectations for a 25bps rate cut runs high.

German consumer inflation rises in June

Consumer prices in Germany posted a second straight month of increase in June. Data from statistics agency Destatis revealed on Tuesday that German consumer price index climbed at a rate of 0.30% on a year over year basis in June. This follows May’s increase in consumer inflation of 0.10%.

On a month over month basis, consumer prices increased 0.10% in June, slowing from May’s 0.30% increase. The data confirmed the preliminary CPI estimates published in late June. The EU’s measure of inflation, the Harmonized Index of Consumer Prices or HICP was up 0.20% on an annual basis, rising at the same pace in the month before. German HICP rose 0.10% on a month over month basis.

Germany Inflation June 2016 – 0.10% m/m
Germany Inflation June 2016 – 0.10% m/m (Source: Tradingeconomics.com)

In a separate report, wholesale prices in Germany fell 1.50% on a year over year basis in June. The declines were smaller than the 2.30% fall seen in May and a 2.70% fall in April. On a month over month basis, wholesale prices increased 0.60% in June, slowing from May’s 0.90% increase.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.