- Low Key BoJ Meeting – Peter Rosenstreich
- BoE Hawkish Shift Changes The Game – Arnaud Masset
- Gold Consolidates And Bitcoin Takes A Serious Hit – Yann Quelenn
- Global High Dividends
FX Market – Low Key BoJ Meeting
The BoJ meeting should be an uneventful event. Despite the one-year anniversary of yield curve control (YCC), growing question of stability and political pressure, now is not the time for the BoJ to act. Governor Kuroda will likely keep the BoJs primary policy framework unchanged. In July, the BoJ decreased its inflation forecast, which in turns changed the time for reaching the banks well published 2% inflation target. The new date is a distant 2019 as inflation trajectory is far from their stated goal. July core CPI, which excludes only fresh foods, increased to 0.5% y/y, core CPI, a strong view of underlying inflation pressures, remained around 0%. Initially, YCC policy likely help to an acceleration of yen weakening in Q4 2016, but much more depreciation would be required to achieve the 2% goal and effect is now limited. Growth on the other hand has picked up with solid activity in 2Q as real GDP growth was 2.5% but spillover into prices have not materialized. So from a stated objective standpoint there is not rush to shift policy position. Recent communications from Kuroda indicates its too early to discuss exits strategies.
Markets will be focused on vote composition after the board members changes (Mr. Kataoka and Mr. Suzuki first meeting) and communication guidelines regarding JGB purchase operation (BoJ have decelerated JGB purchases per operation since mid-August). In addition, timing of the meeting will provide Kuroda a platform to discuss the FOMC. The JPY is now at the crossroads. YCC no longer pro-actively weakens the yen but does setup up environment allowing hawkish foreign central banks (ECB, BoE, Fed, BoC) shift toward normalization to drive JPY downwards. Events around N. Korea has created a safe haven buying rationale, yet in reality real yield differentials remains the primary driver of USDJPY pricing. However, political pressure on Abe could spill over into BoJ policy. Although the board is made up of policy doves a political changes could threaten the BoJ policy path. Without extraordinary measure, the JPY will likely appreciate.
Economics – BoE Hawkish Shift Changes The Game
It has climbed to multi-month amid volatile week as investors anticipate the Bank of England is about to reduce its support to the economy. However, prior to the BoE hawkish shift, the week was punctuated by the release of several key economic indicators. On the inflation side, an upside surprise in August CPI readings gave a first booster to the pound. It was followed by
The headline gauge printed at 2.9y/y versus 2.8% median forecast and 2.6% in the previous month. The core measure, which excludes the most volatile components, came in at 2.7%y/y versus 2.5% expected and 2.4% in July, suggesting that the tick up in fuel price is not the sole explanation. Indeed, the sharp depreciation of the pound sterling over the last few months impacted positively the cost of imported goods. Clothing and footwear component rose 4.6% over the last 12 months, contributing to 0.26 points to the CPIH rate (compared to -0.07 a year ago), while the surge in restaurant and hotels prices contributed to 0.35 points (compared 0.23 a year ago).
On the unemployment front, the July’s jobs report added more impetus to the GBP bulls. The ILO unemployment rate fell to 4.3% July from 4.4% a month ago as employment change rose to 181,000 versus 150,000 median forecast and 125,000 in June. However, average weekly earnings stayed stable at 2.1%y/y versus 2.2% expected. The lack upside pressure in basic wage growth suggest that households’ stalling disposable income won’t accelerate the pick-up in inflation. In addition, the pound sterling has stabilised since the beginning of the year, if not recovered, and this would somehow eases the upside pressure in inflation stemming from the exchange rate.
Finally, the BoE took a more hawkish stance on Thursday and appeared ready to hike borrowing rates against the backdrop of an improving economic picture and most importantly stronger inflation. Prior to the BoE decision, we thought the central bank would take a more dovish stance and would rather emphasized the downside risk created by the Brexit situation. Nevertheless, it is clear now that the BoE believe the economy is strong enough to take a 25bps hike, regardless the potential negative effect a hard Brexit. In addition, it seems that the Brexit negotiations will take longer than expected and that UK lawmakers are finally to take a conciliatory tone and abandon the harsh rhetoric.
Economics – Gold Consolidates And Bitcoin Takes A Serious Hit
Gold has largely increased since the start of the year going from $1150 to $1350. The sharpest increase was during the summer. The decline of the dollar was largely followed by an increase in the precious metal. Now that central banks needs to deliver within the short-term (balance sheet normalization for the Fed, reduction of the asset purchase program for the ECB), we believe that there are more upside for the yellow metal as we consider that global economic conditions are clearly not good enough to support a change in the monetary policy.
Technically, gold is in a clear uptrend channel and as inflation is back in the US, this is another strong point regarding the potential appreciation of the commodity. Yet competition appears and gold, which is one great asset for storage of value is now competing against Bitcoin.
This year has been a great year for the first cryptocurrency so far. Debates are strong regarding the question if Bitcoin will become a safe haven. Jamie Dimon, JP Morgan Chase CEO, has declared that "Bitcoin is a fraud". Cryptocurrencies are a new asset class and the war between fiat money and cryptocurrencies will be on regulatory issues. Recently the People’s Bank of China has triggered a sell-off in the whole cryptocurrency market by forbidding exchanges. Yet, rumours are stating that exchanges will be able to buy licenses in order to be allowed.
Needless to say that the power of money is not a power central banks are willing to let decentralize. Bitcoin took a hit since this comment. Other would also say that China and its ICO ban are weighing on the most famous cryptocurrency. Further downsides are happening but Bitcoin still has a lot of potential. Only less than 0.01% of the global population has a bitcoin wallet.
If this would reach 1%, the demand for Bitcoin would skyrocket, knowing that there are only 18 million coins available at the moment.
Themes Trading – Global High Dividends
Dividends are set to become increasingly important to global investors. Over the past century, dividends have accounted for approximately 50% of total returns earned by investors. Should stock returns flatten, it will be expected dividends that will likely drive growth for investors. This means that in today’s low-yield and low-volatility environment, the stability of dividend-paying stocks with historical total return characteristics has been in high demand.
Companies selected for this theme provide investors with geographical and industry perspective diversification, while offering the potential for capital appreciation and reliable income. This theme attempts to avoid the `dividend trap’ by focusing on companies that have delivered consistent dividend growth with limited share price volatility.
IMPORTANT
The subscription period opens on September 12 and will run until September 25, 2017. This means the price will not move until September 25, the date on which the initial allocation will be made. Do not hesitate to contact us if you have any questions.
