Article / 26 April 2016 at 13:24 GMT

Daily Shot: Aggressive BoJ action could sting massive JPY longs

TradingFloor.com Team / Saxo Bank
Denmark
  • Bank of Japan likely to act as inflation expectations have declined
  • BoJ has a range of tools at its disposal from negative rate loans to more bond buying
  • Goldman sees BoJ boosting QE sharply, ultimately sending USDJPY to 130
  • Goldman sees no scarcity of Japanese government bonds to limit the BoJ
  • Aggressive BoJ easing could prove painful for holders of huge JPY net long
  • French and Dutch companies seen benefiting from ECB's corporate debt buying
  • EUR looks too expensive and USD too cheap based on interest rate differentials


By Walter Kurtz*

Let's begin with Japan where the central bank's policy decision looms large. As inflation expectations decline, the Bank of Japan is likely to act, and all the tools seem to be on the table for its Thursday meeting. These range from providing some banks with negative interest loans (to cushion the impact of negative rates) to a doubling of government bond buying programme and even accelerating the purchases of equity exchange-traded funds.

Japan weekly price index
 
















Source: @ANZ_Research  


Goldman is of the view that the BoJ will boost quantitative easing sharply, ultimately sending USDJPY to 130. An aggressive BoJ easing action could prove painful for many speculative market participants who on the whole hold a massive net long yen exposure (discussed yesterday). 

Bank of Japan Source: Goldman Sachs 


Moreover, Goldman sees no scarcity of Japanese government bonds to limit the BoJ in any way (unlike the situation with the European Central Bank).

Japan govt bonds Source: Goldman Sachs 


While the BoJ's assets as a percentage of the GDP are at unprecedented levels, the central bank's bond holdings as a percentage of JGBs outstanding are comparable to that of the Bank of England for example. Of course that speaks to the size of Japan's outstanding debt. 

BoJ bond buying
Source: Goldman Sachs 


It is expected that expanding QE in Japan will push JGB yields even deeper into negative territory. 

Japan govt bond yields
Source: Deutsche Bank


Separately, Mitsubishi Motors shares just took another leg down, a drop of over 9% on the day. 

Mitsubishi Motors share price Source: Google 


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Turning to China, UBS is warning Hong Kong equity investors that the listed Mainland shares carry default risks. Corporate spreads of many Chinese firms continue to rise. 

Default risks
Source: @mcdonaldsarahj, @justinaknope


Moreover, China's total corporate debt is still increasing, putting the nation's overall debt level above that of the UK and the US.

China debt
Source: ‏@pdacosta, @FT


China's government bond yields bounced this month. Is higher inflation expected or are we about to see a larger supply of government bonds? 

China 5YR
Source: Investing.com


China property valuations have improved sharply as shown in this color chart. 

China property valuations
Source: Morgan Stanley 


With the recent spike in steel prices, China’s steel mill margins jump.

China steel spike
Source: @StuartLWallace, @MartinShanghai 


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Now let's look at a few developments in other emerging economies.

Brazil's 2016 GDP growth continues to get downgraded. 

Brazil GDP projections
 























Source: @SoberLook 


Saudi and Iranian fiscal breakeven oil prices (levels at which governments begin to run a surplus) drop as the nations' governments cut spending. 

Saudi and Iranian breakeven oil prices Source: @JavierBlas2  


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Next, we visit the Eurozone.

This chart shows the European Central Bank's balance sheet vs. European bank shares. QE pushes rates lower and flattens the yield curve, hurting bank margins in the process.

ECB's balance sheet vs bank shares
 Source: h/t Sean 


The Wall Street Journal reminds us that we no longer hear the criticism that central bank interventions create a moral hazard. The ECB's corporate bond purchases certainly reduce incentives for companies to strive for healthier balance sheets to obtain cheaper financing. It seems that French and Dutch companies will especially benefit from this programme. 

French and Dutch bonds benefit Source: @Birdyword 


The euro looks too expensive based on the rate differentials. 

EUR looks overvalued Source: Morgan Stanley 


Related to the above, the US dollar looks undervalued based on the same methodology. 

USD looks undervalued
Source: Deutsche Bank 

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Norway's sovereign wealth fund sees a drawdown as the nation struggles with low oil prices. 

Poor Norway
Source: ‏@business


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Finally, we have a couple of commodity market developments.

Money managers have loaded up on long oil exposure. 

Money managers go long on oil
Source: ‏@JKempEnergy 


Hot money is hitting the commodity markets (as we saw with grains for example), pushing trading volumes to new highs. 

Hot money boosts commodities Source: BAML, @TheStalwart  


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Turning to Food for Thought:

The GOP delegate count projections suggest that the nomination will be decided at the Republican convention. 

Food for Thought-Republican primary
 Source: Goldman Sachs


The stay-at-home dads index seems to follow economic cycles. 
Food for Thought-Stay-at-home-dads index Source: @NickTimiraos 


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— Edited by John Acher

* Walter Kurtz is an alias

**This is an abridged version of the Daily Shot. To subscribe to the full version, link to the Daily Shot and select the appropriate command. E-mail addresses are never shared with anyone.

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