USDJPY Plunges On Japan Stimulus Concerns; US Futures Flat With As Fed Begins Meeting

In a turbulent session for FX, the Yen soared as much as 1.4%, the most in three weeks, after Finance Minister Aso says the government will “leave actual policy measures to BOJ”, sending the Nikkei lower by 1.4%. European stocks and U.S. equity index futures are little changed despite the slide in the key carry pair as the Fed starts its two day meeting.

The GBP/USD sold off in early trading following an FT report that BOE’s Weale favors immediate stimulus, however sterling rebound and erased all
losses in subsequent trading.

The Yen surged started following early press reports, subsequently confirmed by Japan’s finance minister that the government has yet to decide on a fiscal stimulus package, spurring traders to temper expectations. This takes place after aggressive jawboning in recent weeks that Japan may be on the cusp of unleashing helicopter money, with Aso effectively pouring cold water on expectations of a massive fiscal stimulus funded by the BOJ. The result was a plunge in the Yen, which dropped to the lowest levels since the dramatic buying spree in the aftermath of Bernanke’s visit to Japan.

While economists predict the Bank of Japan will ease policy this week, Aso’s comments cast doubt over coordinated efforts by Japanese officials.

“Reports in the local media (Nikkei) and Aso’s comments suggest the Japanese fiscal stimulus package may fall well short of expectations, further dampening hopes of an aggressive, coordinated approach to easing in the near term,” says Sue Trinh, head of Asia FX strategy at RBC Capital Markets.

Bernard Aw, a strategist at IG Asia Pte, reiterated the concern: “Expectations of additional monetary and fiscal stimulus might have been tempered, especially when much was riding on Abe’s stimulus plan. We could also see the Fed trying to strike a balance between sounding upbeat about U.S. economic outlook and curbing exuberance about rate-hike hopes in September.”

“The market is cautious due to risk of policy disappointment,” said Neil Jones, head of hedge fund sales at Mizuho Bank Ltd. in London. “The BOJ may do nothing and the Fed may take on a more dovish angle.”

The Stoxx 600 dropped 0.2% in early trading, with volumes 31% below the 30-day average. BP lost 2.7%, down from a one-month high, led by energy shares after BP Plc reported profit that missed estimates. Lenders declined with Commerzbank AG down 6.1 percent after saying a key measure of financial strength dropped in the second quarter. Italian banks fell, taking the national FTSE MIB Index to the biggest slide among western-European markets, before regulators publish their latest health check on the region’s largest banks on July 29. “We’ve pushed equities up an awful long way over the last few weeks, more than most people had expected,” said Peter Dixon, global equities economist at Commerzbank AG in London. “We are hanging around waiting for something to give us a lift.”

In the U.S., traders have boosted bets the Federal Reserve will raise rates this year, even though they are likely to keep them on hold Wednesday. S&P 500 futures were basically unchanged, down 0.1% after falling Monday from last week’s record-high close. Gilead Sciences Inc. (GILD) fell 4.4 percent in early New York trading after cutting its annual product sales forecast and reporting lower-than-expected sales in the second quarter for its hepatitis C drugs.

Yields on 10-year Treasury notes fell for the first time in three days, sliding three basis points, or 0.03 percentage point, to 1.55 percent. In Germany, yields on similar-maturity debt fell for a fourth day, dropping one basis point to minus 0.05 percent. U.K. gilts also rose, with the 10-year yield falling three basis points to 0.78 percent.

In commodities, the story remained one of oil weakness as crude fell to a three-month low in New York as supplies were considered to be plentiful even as stockpiles were seen deepening a record pullback in the U.S., the biggest fuel consumer. West Texas Intermediate fell 0.6 percent to $42.87 a barrel and Brent slid 0.3 percent to $44.61. While U.S. crude inventories probably slid by 2.25 million barrels, gasoline supplies are seen increasing by 600,000 barrels, swelling stockpiles that are also at the highest in decades, according to a Bloomberg survey before an Energy Information Administration report Wednesday.

Verizon Communications Inc. (VZ), McDonald’s Corp. (MCD) and Apple Inc. (AAPL) are among 45 companies in the S&P 500 reporting earnings on Tuesday. Profits and
sales have broadly topped projections so far this season, and analysts have eased their estimates for declines in net income, expecting a 4.5
percent slide for the second quarter for S&P 500 members.

Market Snapshot

• S&P 500 futures down less than 0.1% to 2162
• Stoxx 600 down less than 0.1% to 341
• FTSE 100 up 0.3% to 6729
• DAX up 0.1% to 10213
• German 10Yr yield down less than 1bp to -0.05%
• Italian 10Yr yield up less than 1bp to 1.24%
• Spanish 10Yr yield unchanged at 1.11%
• S&P GSCI Index down 0.3% to 344
• MSCI Asia Pacific up 0.4% to 135
• Nikkei 225 down 1.4% to 16383
• Hang Seng up 0.6% to 22130
• Shanghai Composite up 1.1% to 3050
• S&P/ASX 200 up less than 0.1% to 5537
• U.S. 10-yr yield down 3bps to 1.54%
• Dollar Index down 0.35% to 96.95
• WTI Crude futures down 0.7% to $42.84
• Brent Futures down 0.4% to $44.55
• Gold spot up 0.5% to $1,322
• Silver spot up 0.7% to $19.69