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Categorized | Currencies, Equities

Equity markets rally as BoJ tweaks policy

Posted on September 21, 2016

Illustrative picture shows Japanese 10,000 yen bank notes spread out at an office of World Currency Shop in Tokyo in this August 9, 2010 illustrative picture. REUTERS/Yuriko Nakao/File Photo©Reuters

Wednesday 06:45 BST. Worldwide equity gauges are rallying and the yen is weakening after the Bank of Japan tweaked its monetary policy ahead of a decision on interest rates by the Federal Reserve later in the day.

The Japanese central bank on Wednesday kept interest rates on hold at minus 0.1 per cent but did not ruling out taking them further into negative territory if needed, and it introduced a zero interest rate target for 10-year government bonds, stepping up its battle against deflation.

    Benchmark JGB yields, which move inversely to the price, have started to discount this strategy, adding 3 basis points to minus 0.03 per cent, its first rise in seven sessions.

    The BoJ also kept the scale of its quantitative easing programme steady at ¥80tn yen per year, but said that target may fluctuate as the Bank tries to control borrowing costs along the yield curve.

    The BoJ’s statement included an assessment of its easing policies, in which it largely blamed failure to reach the 2 per cent inflation target on “a variety of exogenous factors such as a fall in crude oil prices” as well as sluggish global growth and financial volatility.

    After initial wobbles that suggested disappointment the BoJ had not gone far enough, action in forex and stock markets suggests investors are welcoming the BoJ’s efforts.

    The yen is — which had appreciated 3.5 per cent since the BoJ’s previous meeting in July — is 1 per cent weaker at ¥102.68, and this helped the exporter-sensitive Nikkei 225 equity average to jump 1.8 per cent as risk appetite spreads beyond Tokyo.

    After Hong Kong’s Hang Seng rose 0.6 per cent and Australia’s S&P/ASX 200 added 0.8 per cent, the pan-European Stoxx 600 is in line to add about 0.2 per cent, likely supported by energy stocks as Brent crude advances 1.3 per dent to $46.46 a barrel.

    US index futures suggest the S&P 500 will add 5 points to 2,145. The Wall Street benchmark has barely budged for the first two sessions of the week as traders have proved reluctant to make hefty bets ahead of the Fed’s decision on rates, due at 1900 BST.

    Futures markets are pricing in just a 22 per cent chance the Fed will raise borrowing costs by 25 basis points this month, but traders will be keen to hear the central bank’s accompanying comments for clues about the likely pace of future hikes.

    In the meantime, the dollar index, which tracks the buck against a basket of its peers is up 0.2 per cent and 10-year Treasury yields are adding 2bp to 1.71 per cent. Equivalent maturity german Bunds are steady at zero per cent.

    Gold, which is sensitive to monetary policy expectations, is down 0.1 per cent at $1,313 an ounce.

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