Mind The Gap; Mid Morning London Session Update Before New York Opens
The Bank Of Japan Maintains Stimulus Sending USD/JPY Through 100 Barrier As Australian Trade Balance Crashes Into The Red 
At its monthly meeting Japan’s central bank, (the BOJ), decided to maintain its stimulus (monetary easing) at the same rate of ¥60-70 trillion, ($600/700bn) per year. The officials at the bank believing that Japan’s economy is undergoing an improvement and as a consequence, if the stimulus is stopped too early, that recovery would be harmed.
Recent Japanese data has been encouraging; the jobless rate is at its lowest level in almost five years, summer bonuses have increased and core consumer prices are rising at the fastest pace in nearly five years, suggesting the ‘deflation fight’ is being won. Finance ministry data on Monday also showed a healthy increase in corporate capital spending, suggesting a sharp upward revision in the second-quarter GDP data due for publication next week, up from a preliminary 2.6 percent expansion.
Sales tax will be raised to 8 percent from 5 percent in April and to 10 percent in October 2015 taking into consideration the BOJ’s “tankan” business sentiment survey, which is due for release on October 1st.
The overall effect of the policy decisions and accompanying BOJ statement was to send the greenback up through the 100 level versus yen for the first time in over six weeks, whilst the Nikkei closed up marginally on the session.
BOJ Statement on Monetary Policy
“The Bank will continue with quantitative and qualitative monetary easing, aiming to achieve the price stability target of 2 percent, as long as it is necessary for maintaining that target in a stable manner. It will examine both upside and downside risks to economic activity and prices, and make adjustments as appropriate.
“Such conduct of monetary policy will support the positive movements in economic activity and financial markets, contribute to a rise in inflation expectations, and lead Japan’s economy to overcome the deflation that has lasted for nearly 15 years.
“Japan’s economy is recovering moderately. Overseas economies as a whole are gradually heading toward a pick-up, although a lackluster performance is partly seen. In this situation, exports have generally been picking up. Business fixed investment is starting to pick up as corporate profits have improved. Public investment has continued to increase, and the pick-up in housing investment has become evident. Private consumption has remained resilient, with some improvement observed in the employment and income situation. Reflecting these developments in demand both at home and abroad, industrial production is increasing moderately. Meanwhile, financial conditions are accommodative. On the price front, the year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations appear to be rising on the whole.”
Australia International Trade in Goods and Services
Australia’s economy, in terms of its balance of payments, delivered a mild shock to the markets in the overnight/early morning session by publishing data showing that the balance of payments had found reverse gear. For a nation with an economy wedded to exports, particularly to its major trading partner China, this data was unwelcome, RBA and govt. officials in Australia must be hoping that this is a one off outlier result as opposed to a developing trend.
In trend terms, the balance on goods and services was a deficit of $129m in July 2013, an increase of $81m (169%) on the deficit in June 2013. In seasonally adjusted terms, the balance on goods and services was a deficit of $765m in July 2013, a turnaround of $1,008m on the surplus in June 2013. In seasonally adjusted terms, goods and services credits rose $54m to $26,202m. Non–rural goods rose $113m (1%), rural goods rose $86m (3%) and net exports of goods under merchanting rose $1m (8%).
Attention now focuses on Mario Draghi, the ECB president
All eyes will now turn to the UK’s BoE, due to deliver both its base interest rate decision and monetary stimulus policy decision at midday UK time, both predicted to remain static at 0.5% and £375bn respectively. Thereafter the markets will concentrate on the ECB’s base rate decision and perhaps more importantly on the accompanying narrative courtesy of Mario Draghi, the president of the central bank.
Market snapshot at 10:15 am UK time; European equities rally
The Nikkei closed up marginally in the overnight/early morning session after the BOJ policy decision, up 0.08% at 14064.82. The Hang Seng closed up 1.22% whilst the CSI closed down 0.38%. The ASX 200 closed down 0.37%.
European equity indices are, with few exceptions, enjoying a rally in the first part of the morning session. STOXX up 0.40%, UK FTSE up 0.82%, CAC up 0.40%, DAX up 0.37%. The Istanbul equity index, arguably the index most sensitive to the Syrian crisis, is currently down 0.76% as the G20 summit begins in Moscow.
Looking towards the New York open the DJIA equity index future is currently down 0.08%, the SPX down 0.07% and the NASDAQ down 0.04% suggesting that USA markets may open marginally down as sentiment is currently indecisive.
ICE WTI oil is up 0.48% at $107.74 per barrel, NYMEX natural is down 0.22% at $3.69 per therm, whilst COMEX gold is down 0.17% at $1387.60 per ounce, with silver on COMEX up 0.06% at $23.43 per ounce.
Forex focus
The dollar rose 0.2 percent to $1.3176 per euro early in the London session after reaching $1.3139 on Sept 3rd, the strongest level seen since July 22nd. The U.S. currency gained 0.3 percent to 100.03 yen after climbing to 100.12, the most since July 25th. The euro was little changed at 131.80 yen.
The Aussie fell 0.3 percent to 91.50 U.S. cents late in Sydney’s session after earlier touching 91.88, the most since Aug 19th. It was little changed at 69.47 euro cents after rising 3.3 percent in the past three days. It traded at A$1.7068 per pound from A$1.7036 yesterday. New Zealand’s kiwi declined 0.4 percent to 78.76 U.S. cents and 78.57 yen.
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