The main catalyst that has pushed stocks to new all time highs, and sent the Yen plunging the most in the 21st century last week, were reports that Ben Bernanke was urging Japan to unleash helicopter money. Indeed, just yesterday, the USDJPY hit new two month highs on reports Japan was considering doubling the previously rumored fiscal stimulus of JPY10 trillion to 20, with the implication that the BOJ would provide the funds. It appeared that Japan had found just the jawboning tagline to keep stocks levitating and the Yen dropped: just hint every other day that more helicopter-funded stimulus is coming and jawbone assets, the same way verbal hints of more BOJ QE worked in 2015.
Which is why we were surprised to read this morning that BOJ governor Kuroda had shut down Bernanke, saying there is no need and no possibility of helicopter money in Japan, increasing speculation about the course of monetary and fiscal policy in the world’s third-largest economy. Given the current institutional setting, there is “no need and no possibility for helicopter money,” Kuroda said in a BBC Radio 4 program that was broadcast Thursday. “At this moment, the Bank of Japan has three options with quantitative and qualitative easing with negative interest rates.”
These current policies can be expanded, he said. Kuroda also repeated that he is determined to rid Japan of its deflationary mindset, and that there are no significant limitations to further monetary stimulus if needed by the BOJ.
Which, however, is not true: like the ECB, the BOJ is rapidly running out of willing bond sellers as its universe of eligible bonds gets smaller, while NIRP has proven to be far more deflationary than anyone had expected. In fact, the only way the BOJ’s policies can continue is if the government opens the debt issuance spigot, which is all that helicopter money really is. We are confident that Kuroda gets this, and we are confident that despite his reverse-jawboning today, helicopter money is precisely what will happen.
But first there needs to be a crisis. As BofA’s Athanasios Vamvakidis said, “markets had run ahead of themselves, expecting too much. Helicopter money is the inevitable end game in Japan, but we aren’t there yet, it will be the bazooka that the BOJ will use after a crisis.” So we just need the crisis. For now however, there is none, and immediately after Kuroda’s interview, the Yen soared, strengthening against all 16 of its major peers. The USDJPY tumbled more than 1% in the minutes after Kuroda’s interview was released.
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“Kuroda has just given investors a bit of a disappointment,†said Peter Garnry, head of equity strategy at Saxo Bank A/S in Hellerup, Denmark. “The market had actually changed its sentiment and pricing based on the assumption that we would get something big on the fiscal stimulus side, and that Japan would be the first wave.â€
Meanwhile, almost $5 trillion has been added to the value of global equities since June 27 amid signs central banks including the BOJ will boost stimulus to shore up economies after the U.K. voted to leave the European Union.
Elsewhere, the euro hovered near a three-week low amid speculation the European Central Bank will leave rates unchanged and signal further easing for later in the year when Mario Draghi speaks in two hours.
The Stoxx Europe 600 Index slipped 0.4%, with share of airlines sliding after Deutsche Lufthansa AG cut its earnings forecast. Lufthansa tumbled 8.4 percent, and EasyJet Plc slid 5 percent after posting a drop in quarterly revenue. Tele2 AB lost 6.4 percent as its earnings missed estimates. Hermes International SCA gained 3.4 percent as the luxury clothing and handbag maker said its profitability improved. Miners in the Stoxx 600 advanced for the first time in three days.
Turkish stocks fell the most worldwide after the president called for a state of emergency and S&P Global Ratings cut the country’s credit score. S&P 500 futures expiring in September lost 0.2 percent, while the MSCI All-Country World Index gained 0.1 percent, trading at its highest level since November. In the U.S., Intel Corp. slipped 2.8 percent in early New York trading after reporting slower growth in its server-chip division, while Qualcomm Inc. gained 6.5 percent as its results showed the chipmaker is overcoming hurdles in China. Joy Global Inc. rallied 20 percent after Japan’s Komatsu Ltd., the world’s second-biggest mining and construction equipment maker, agreed to buy it. Komatsu added 2.3 percent.
The Borsa Istanbul 100 Index slumped 3.8 percent. Turkey imposed a three-month state of emergency as the government pursues those responsible for last week’s failed military coup, detaining thousands of army officers, judges and prosecutors. A wider purge is under way that encompasses universities, schools and the civil service. The country won’t be under military rule, with army units taking orders from provincial governors, President Recep Tayyip Erdogan said in Ankara on Wednesday.
Germany’s 10-year bond was little changed, with the yield at minus 0.005 percent. The yield on similar-maturity U.S. Treasuries was 1.58 percent. It sank to a record 1.32 percent on July 6 and analysts see it ending the year at 1.74 percent, a Bloomberg survey shows.
Market Snapshot
- S&P 500 futures down 0.2% to 2164
- Stoxx 600 down 0.4% to 340
- FTSE 100 down 0.4% to 6703
- DAX down 0.2% to 10117
- German 10Yr yield up less than 1bp to -0.01%
- Italian 10Yr yield up less than 1bp to 1.25%
- Spanish 10Yr yield down 2bps to 1.14%
- S&P GSCI Index up 0.1% to 355.4
- MSCI Asia Pacific up 0.9% to 135
- Nikkei 225 up 0.8% to 16810
- Hang Seng up 0.9% to 22090
- Shanghai Composite up 0.3% to 3036
- S&P/ASX 200 up 0.4% to 5512
- US 10-yr yield down less than 1bp to 1.58%
- Dollar Index down 0.28% to 96.93
- WTI Crude futures up less than 0.1% to $45.79
- Brent Futures unchanged at 47.17
- Gold spot up 0.5% to $1,322
- Silver spot up 0.4% to $19.48
