European futures are trading significantly lower this morning, following in the footsteps of Asian markets. Over in Asia, it was all about the Bank of Japan’s policy rate decision. The bank has surprised the markets with their unpredictable behavior. This is something that we said yesterday; never underestimate the power of the central bank because they can be mercurial with their approach. The approach used by the BOJ was completely unexpected as their monetary policy remained unchanged. What was expected of them was another bazooka, worth 20 trillion yen, of asset purchases along with a cut in their interest rate.
Not long ago, the bank had already completed a hefty asset purchase program and had also slashed their interest rate. As for today, the bank decided to keep their monetary policy on hold and maintained the asset purchase program at 80 trillion yen and did not move the needle on the interest rate either. Both actions were a massive surprise and contrary to expectations. As a result, traders have taken their full revenge. The Japanese stock market tumbled and dropped nearly four percent before recovering some of their losses. The Japanese yen has had some luck against the dollar and has recovered some of its lost ground experienced over the past few days due to the QE expectations.
The Japanese exporters were under a heavy selloff due to the strength of the yen. Names like Toyota and Nissan whose margins have been very much impacted due to the move in the currency have led the selloff. A stronger yen mostly serves as a negative sign for export-based companies.
The Royal bank of New Zealand has also kept its interest rate unchanged, but the surprise element over there was minimal as it was already expected from them.
Back in the US, one of the major events yesterday was the FOMC statement and what we said yesterday was that the Fed may show their hawkish side by prepping the market for another rate hike as the global economic conditions have improved due to the stability in the commodity prices and the volatility dying off in the Asia. What the Fed has said in their statement yesterday was very much along these lines. They have dropped the phrase which refers to the global economic concerns and have said that the possibility of June rate hikes is very real. If you look at the odds of the US increasing the interest during the month of June after the statement, they have changed considerably now.
But if you think that the Fed can lift the interest rate just because they are less wary of the global economic conditions, then that is certainly not the case. Their mandate is to maintain the price stability. However, inflation has not improved and unless we see some further signs of this, they will be a little hesitant. Having said that, the stability in oil prices could easily bring this result for the Fed and therefore, the possibility of the Fed raising the interest rates in June or August are highly likely.
by Naeem Aslam