- Japan’s stimulus plans underwhelm, USD/JPY -1.45% to 100.9
- S&P 500 VIX volatility index +7.3% to 13.3
- S&P 500 falls for second day in a row -0.6% lead by the retailers and automakers
- European bank stocks have their worst day since Brexit
- DXY US Dollar Index drops 0.65% to 95.08
- WTI oil -1% to US$39.7
- S&P 500 energy, however, gained +0.9%
- US PCE inflation and consumer spending both disappoint
Japanese stimulus a fizzer
Markets have continued to drop overnight as the third arrow of Abenomics struggles to find its target, investors continue to worry about the capital adequacy of European banks and US inflation and consumer spending disappointed.
The main bright spot is that the declines in the oil price looked to have slowed and the price of put options on both WTI and Brent continue to decrease, showing investors see less downside risk for oil at these levels.
The Japanese cabinet formally approved the 28 trillion yen (US$275 billion) fiscal spending package yesterday, including 4.6 trillion yen in new outlays in this financial year. But the markets were unimpressed in a great display of “buy the rumor, sell the fact” trading.
The IMF also released its Article IV report on Japan stating that far more needs to be done with regards to structural reforms in Japan, such as easing the ability of Japanese firms to fire employees, making it easier for women to stay in the workforce throughout their careers, and loosening their strict laws regarding immigration. Suggestions seemingly likely to fall on deaf ears.
US data continues to disappoint, which is fuelling the big pullback in the DXY dollar index as speculative calls for a Fed rate hike in September begin to fall silent. PCE inflation appears to have hit a wall after gaining in the first quarter of the year, and looks like it could even begin to start pulling back in second half of the year.
The selling in the DXY US dollar index has really begun to pick up, and should non-farm payrolls on Friday disappoint market expectations it could be looking to retest its May low of 92.6.
European banks had their biggest one day fall since the Brexit vote. The EuroStoxx 600 banks index lost 3.5%. After some initial euphoria with banks coming out of their Friday stress tests better than expected and Italy’s Monte dei Paschi planning EUR 5 billion capital raising, sentiment has drastically turned as investors are baulking at the “pricey” offerings some of these banks are hoping to bring to market.
Selling is set to continue into the Asian session, with the focus of investor ire being Japan. The Nikkei is set to open down 1.6% after another big round of strengthening in the yen overnight. Sentiment is likely to drive some of this selling, but so will overnight FX moves.
The further 0.7% drop in the US dollar index has seen all major currencies strengthen against the USD, which will be an impediment for exporters in Asia-Pacific markets, but may also stem the selling seen in the materials and energy space as they benefit from a weaker USD boosting commodity spot prices.
Despite a further 1% decline in the WTI oil spot price, the S&P 500 energy sector gained 0.9%, which bodes well energy stocks in Asia today in what looks to be an otherwise dismal session.