Despite Huge BOJ Disappointment, Global Stocks Rise, US Equity Futures Flat As Yen Soars

European stocks and Asian shares rose, U.S. equity futures were unchanged and the yen surged after the BOJ shocked markets and kept its QE program unchanged, defying market expectations of a big boost to its monetary stimulus program.

The session’s key event, last night Bank of Japan policy announcement, the most anticipated in years, was – as we predicted yesterday when we said that it would be impossible for the central bank to meet market expectations – a dud, one which sparked a surge in the yen and sending government bonds and emerging-market stocks lower.

Japan’s currency soared against all of its 31 major peers after the BOJ effectively punted to the next meeting, keeping its government-bond buying target and policy interest rate unchanged, opting instead to increase double exchange-traded fund purchases to 6 trillion yen ($58 billion) a year, the BOJ said. The result was a 1.5% spike in the yen, bringing its gain this year to about 16 percent.

The BOJ’s expanded stimulus “was as minimal as possible,” said Stefan Worrall, director of equity cash sales at Credit Suisse Group AG in Tokyo. “The tension was extremely high going into the announcement, and the market has reacted in a way that has perhaps reflected that.”

Yields on 10-year JGBs climbed the most since 2013, while rates on similar-maturity Treasury notes increased from a two-week low. As shown below, JGB futures tumbled the most in two years.

Many expected the disappointing BOJ announcement to send equities lower: “the yen’s move shows how the market is disappointed,” Nicholas Teo, a strategist at KGI Fraser Securities, said. “That’s got to trigger a risk-off move in equities. The market had expected very generous stimulus from the BOJ.” However, while the market soared in the past several weeks on expectations of helicopter money, it has failed to retrace any part of the move on the news.

Indeed, while the BOJ announcement sent volatility in FX and rates soaring, after an initial plunge in the Nikkei as much as 2% lower, then rebound, then another plunge, Japan’s stock index rose, and finally closed up 0.6% mostly on the back of a relief rally in the banks which were bought after the BOJ did not cut its negative interest rate even more. “The ETF purchase is directly good for the market,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “The BOJ didn’t go further into negative rates, so it’s good for the financial stocks.”

In Europe, better-than-estimated earnings from Barclays Plc and UBS Group AG helped stocks extend their biggest monthly advance since October. Meanwhile, oil continued to sell off, and is now headed for a bear market, while gold pared a second month of gains.

As Bloomberg reports, a month of big swings in the $5.3 trillion-a-day foreign exchange market is set to end with a bang as markets digest the BOJ’s decision, and in a few hours the U.S. is set to report Q2 GDP, where it is expected to show a pickup in economic growth and results of bank stress tests in Europe. Earlier today Europe reported its own Q2 GDP which came in line with expectations at 0.3%, half of the growth rate seen in the first half.

Ignoring the BOJ disappointment, the Stoxx Europe 600 Index climbed 0.4%, taking its monthly increase to 3.2%. The rebound hasn’t been enough for the gauge to recoup its losses following the U.K. vote to quit the European Union. Barclays jumped 6% as its core units posted adjusted pretax profit that topped projections and UBS climbed 2.8 percent. Italy’s Banca Monte dei Paschi di Siena SpA rallied 7.1 percent after it received a proposal. Stress-test results are due at 10 p.m. Milan time on Friday. Electricite de France SA surged 9.4 percent as its earnings beat projections and it maintained its 2016 objectives. The British government cast doubt on the future of a nuclear-power project in the U.K. ArcelorMittal rose 5.1 percent after posting its highest quarterly profit since 2014.

While the S&P 500 Index futures slipped 0.2 percent, we expect initial weakness to be bought and US stocks will close well in the green, adding to July’s 3.4% gains. Google parent Alphabet advanced 3.5 percent in early trading after reporting second-quarter earnings and sales that beat analysts’ estimates as growth in cloud-computing and corporate software businesses improved. Amazon.com Inc. (AMZN) rose 1.4 percent as profit topped projections.

The MSCI Emerging Markets Index slid 0.7 percent, leaving it 4.3 percent higher on the month. Both gauges are headed for the best month since March.

The yield on Japan’s 10-year bonds jumped eight basis points to minus 0.19 percent, set for the steepest increase May 2013, based on closing prices. Yields on Treasuries with a similar maturities rose two basis points to 1.53 percent, having been at 1.48 percent earlier, the lowest since July 14. Treasury yields are still set for a weekly drop after Fed officials signaled this week they are in no rush to raise interest rates, even as they noted that near-term risks to the economic outlook have diminished. The economy probably grew at a 2.5 percent annualized rate from April through June, according to the median estimate of 76 forecasters before Friday’s release.

On today’s calendar, the US Q2 GDP report is front and center however there’s also other important data in the form of the employment cost index (expected to be +0.6% qoq), Chicago PMI for July (expected to decline 2.8pts to 54.0) and the final revisions to the July University of Michigan consumer sentiment report. There’s also a bit of Fedspeak to contend with with Williams and Kaplan both scheduled.Investors are also watching earnings from companies including Merck & Co., Exxon Mobil Corp. and Chevron Corp. for further clues on how global monetary stimulus is filtering through the economy. A potential key risk event will the be the European stress test announcement which may impact Italy’s insolvent Monte Paschi, which is rushing to arrange a last minute bailout plan.

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Market Snapshot

• S&P 500 futures down 0.1% to 2163
• Stoxx 600 up 0.4% to 341
• FTSE 100 down 0.2% to 6708
• DAX up 0.5% to 10325
• German 10Yr yield up 2bps to -0.07%
• Italian 10Yr yield up less than 1bp to 1.21%
• Spanish 10Yr yield down less than 1bp to 1.09%
• S&P GSCI Index down 0.9% to 333.5
• MSCI Asia Pacific up 0.5% to 136
• Nikkei 225 up 0.6% to 16569
• Hang Seng down 1.3% to 21891
• Shanghai Composite down 0.5% to 2979
• S&P/ASX 200 up 0.1% to 5562
• US 10-yr yield up 2bps to 1.53%
• Dollar Index down 0.37% to 96.38
• WTI Crude futures down 1.3% to $40.62
• Brent Futures down 1.9% to $41.89
• Gold spot down 0.3% to $1,332
• Silver spot down 0.6% to $20.05