FX: Are US stocks scared by the Bank of Japan?
The US stock market had a good rally, and the Dow almost went down in history with 14 consecutive rallies (if it were 14 consecutive rallies, it would be the longest consecutive rise since June 1897). Unfortunately, during the session, the Bank of Japan will discuss adjusting the yield curve control (YCC), so that the news that long-term interest rates are above the upper limit suddenly came out. If the Bank of Japan does adjust the YCC policy, the market will be regarded as the start of the tightening cycle, which startled the capital markets, and the three major US stock indexes suddenly turned down. In the end, the Dow closed down 0.67%, stopping the daily 13 consecutive gains, the Nasdaq fell 0.55%, and the S & P 500 fell 0.64%. When the Bank of Japan first changed its policy in December last year, the financial marekt caused a huge wave.
European stocks dodged an early close. The European Central Bank raised interest rates by 0.25 percentage points on Thursday, but did not offer much hawkish language after the rate hike. European stocks rallied en masse, with France's CAC 40 up more than 2 percent and Germany's DAX 30 up 1.7 percent.
In addition, there is a big news for the US banking industry. According to Bloomberg, the top banking regulator in the United States has announced the most comprehensive capital base reform plan in years, and large banks will be required to increase the size of their capital base to cope with possible unexpected losses. According to a report released by the Federal Reserve, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency on Thursday, banks with assets of at least $100 billion must increase their capital base by about 16%, and the largest eight banks need to increase their capital base by about 19%.
On the evening of July 27, Beijing time, the United States disclosed a number of positive data. Among them, the real GDP of the United States in the second quarter increased by 2.4% year-on-year, which greatly exceeded the 1.8% expected by the market and also exceeded the 2% in the first quarter. The White House said that the GDP data showed healthy economic growth.
At the same time, the core personal consumption expenditure (PCE) price index in the second quarter of the United States fell to 3.8% month-on-month, lower than the market expectation of 4%, and the previous value was 4.9%, indicating that inflation was well controlled.
In addition, the United States in July 22nd week for the first time to apply for unemployment benefits for 221,000 people, lower than the market expectations of 235,000 people, the previous value of 228,000 people; the United States in June durable goods orders increased by 4.7%, expected to increase by 1%; the United States in June signed house sales index rose 0.3%, expected to decline by 0.50%; according to the United States Census Bureau released data, the United States in June goods trade deficit of 87.80 billion dollars, estimated deficit 92 billion dollars, May is 91.90 billion dollars.
The above series of data shows that the US economy is functioning well. After the data was disclosed, the US dollar index rose sharply and turned red, after falling about 0.3%; spot gold plunged short-term, spot silver fell 3% at one point, and the three major US stock futures indexes rose steadily.
Then, at around 21:30 on the evening of the 27th, Beijing time, the three major indexes of US stocks opened higher collectively. The Dow index opened up 0.24%, the Nasdaq index rose 1.36%, and the S & P 500 index rose 0.78%. However, in the session, a news about the Bank of Japan came out, causing US stocks to turn downward.
According to Japanese media reports, the Bank of Japan's monetary policy meeting this Friday will discuss adjusting the yield curve control (YCC) policy to allow long-term interest rates to rise to a certain extent above the upper limit of 0.5%. If the Bank of Japan does adjust the YCC policy, the market may see the start of a tightening cycle. This news caused the yen to rise against all major currencies, with the yen rising by 2% against the euro and nearly 1% against the dollar.
The news rattled the US stock market, where investors took advantage of the recent rally. When the Bank of Japan first changed its policy in December, financial marekting took off.
The YCC is essentially an interest rate tool that maintains the yield curve at the expected level by setting the target level of the yield of each term. The Bank of Japan introduced the YCC control to implement super easing since 2016. The current YCC policy of the Bank of Japan sets the yield fluctuation range of 10-year Japanese government bonds at ± 0.5%. Once the yield may exceed 0.5%, the Bank of Japan will buy Japanese bonds. And if the range of the target range of yield fluctuation is expanded, the Bank of Japan can reduce the scale of bond purchases. When the Bank of Japan announced in December that it would allow the yield of Japanese 10-year government bonds to rise to about 0.5% (the previous ceiling was 0.25%), it caused an uproar throughout the financial marekt. Yields on government bonds jumped and the yen rose sharply, affecting everything from U.S. stocks to the Australian dollar and gold.
Although there are still doubts about whether the Bank of Japan will really adjust its yield curve control (YCC) policy this time, the market is still spooked. As of the close on July 27, the Dow fell 0.67%, the Nasdaq fell 0.55%, and the S & P 500 fell 0.64%. In terms of individual stocks, Tesla fell more than 3%, Netflix and Microsoft fell more than 2%. Popular Chinese stocks also fell, with Bilibili and Kingsoft Cloud falling more than 6%, JD.com falling more than 2%, and Alibaba, NetEase, and Baidu falling more than 1%.
On July 26 local time, the Federal Reserve announced a 25 basis point interest rate hike. After the hike, the target range for the US federal funds rate has risen to between 5.25% and 5.5%, the highest level since 2001. This is also the 11th time the Federal Reserve has raised interest rates since the start of this round of interest rate hikes in March last year, with a cumulative rate of 525 basis points.
Federal Reserve Chairperson Jerome Powell said there would be no rate cut this year, and whether to raise interest rates again in September depends on the follow-up data. At the same time, the Federal Reserve adjusted the expression of economic expectations that there will be no recession in the United States this year.
CICC believes that as inflation slows, the Federal Reserve may be more patient in raising interest rates, and the Fed may "skip" raising interest rates in September, considering that core inflation may continue to decline in the next two months, driven by used cars and rents. But the inflation risk posed by the current labor market and the economy exceeding expectations cannot be ignored. As the base effect weakens, inflation may still pick up at the end of the year, which means that there is still a possibility of interest rate hikes in the fourth quarter.
On Thursday, major European stock indexes rallied en masse. By the end of the day, the European Stoxx 50 was up 2.33%, France's CAC 40 was up 2.05%, and Germany's DAX 30 was up 1.70%.
Following in the footsteps of the Federal Reserve, the European Central Bank announced another 0.25 percentage point increase on Thursday. Since the start of the rate hike process in July last year, the European Central Bank has raised interest rates nine times in a row, for a total of 425 basis points.
The European Central Bank held a monetary policy meeting on the same day and decided to raise the three key interest rates in the euro zone by 25 basis points. The European Central Bank announced on the same day that the main refinancing rate, marginal lending rate and deposit mechanism rate were raised to 4.25%, 4.5% and 3.75% respectively.
The ECB said that while some indicators showed signs of a slowdown, overall underlying inflation remained high and inflation expectations were expected to remain elevated for an extended period of time. Future ECB decisions will ensure that interest rates are set at sufficiently restrictive levels for as long as necessary to achieve a timely return to the 2 per cent target.
The ECB statement showed that past interest rate hikes continue to be transmitted forcefully, with financing conditions tightening again and increasingly depressing demand, an important factor in bringing inflation back to target. The ECB also stressed that future interest rate decisions will continue to be based on its assessment of the inflation outlook in light of upcoming economic and financial data, underlying inflation dynamics, and the strength of monetary policy transmission. The tone of the statement was not distinctly hawkish, with traders putting the likelihood of a 25 basis point ECB rate hike in September at around 40%, slightly lower than the pre-decision rate of around 44%.
FXTForex pointed out that the European Central Bank's statement appeared to be a dovish statement. European stock markets continued to climb after the ECB statement was released.
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