BoJ and Fed speculation rife

We’re seeing some disjointed moves in Asia today, with a degree of consolidation the dominant theme.

Source: Bloomberg

The leads from Europe and the US were quite mixed and this put investors in a tough spot heading into Asia. There are two key central bank meetings this week, namely the FOMC and BoJ. These two events are a great source of uncertainty at the moment and this is the likely driver of current consolidation.

While the US dollar pulled back a touch in US trade as pending home sales and services PMI data failed to inspire, traders are likely to be hesitant being caught out short the greenback. This week’s meeting presents an opportunity to surprise as there is plenty of speculation around the asset purchase program coming to an end.

Fed member James Bullard floated the idea of delaying the end of QE and the ultra doves will be hoping this comes to fruition. However, I feel this is highly unlikely and the real risk will be a shift in language to a much less dovish tone. There has also been talk about the removal of the timeline reference to lift off when it comes to rates. Should the ‘considerable time’ reference be removed, this would be highly supportive of the USD and negative for equities.

Fed could wait for December meeting

With US data continuing to improve, particularly on the jobs front, any suggestion of data dependency on rates is likely to be interpreted as hawkish. Inflation might be a concern though as commodity prices fall, particularly energy. Additionally, the Fed has a tendency to balance things out and global growth concerns could be a key talking point. Some analysts feel the Fed will play it safe at this meeting and wait until December for any surprises, as that meeting will contain updated forecasts.

Earnings-wise, Twitter came in in line with estimates but was smashed after hours. It seems some analysts aren’t happy with the user growth reported, meaning it could remain under pressure as investors react later today. All-in-all, earnings have been ticking along well. 43% of S&P companies having reported – 79% have beaten on EPS and around 60% have beaten on revenue. Reporting today, we have Facebook as the highlight.

BoJ under pressure to act

Data has been limited in Asia but Japan has remained a focal point after retail sales data came in much stronger than expected at 2.3% (versus 0.9%). There has been plenty of speculation that Abenomics has not worked as hoped and the BoJ might finally be looking to pull the trigger again. Governor Kuroda has been quite vocal, saying he will act if data disappoints. This puts this week’s CPI firmly in focus.

Activity really ramps up at the end of the week, when we have the BoJ meeting along with CPI data. There is a possibility we could see an extension to the asset purchase program and the second leg of the sales tax hike could also be in doubt. Having said that, USD/JPY and Japanese equities will be the key asset classes to watch this week. I feel dips will be used as an opportunity to buy.

Europe in for a recovery

Ahead of the European open, we’re calling the major bourses positive with a bit of a recovery after yesterday’s weakness. Italy was the main source of weakness as the asset quality review (AQR) showed financial institutions for the country were quite strained, which also resulted in a spike in Italian bond yields.

On a positive note, the ECB announced it bought €1.7 billion worth of covered bonds in the first week. This is likely to calm investor nerves around AQR results in the near term. European markets also seem like they are headed for some consolidation ahead of the FOMC meeting. Out of the US today we have durable goods orders, the Case-Shiller index and consumer confidence due out.

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