Global stocks set to soar after Bank of Japan and Fed tackle hard issues…
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The Nikkei 225 index is currently trading at 16,664.82, up 1.72% or 281.78 points. For the year-to-date, the premier Japanese index is down 12.45%, largely owing to the sharp appreciation of the Japanese yen. Over the past 3 months, the Nikkei 225 index has recovered dramatically and posted losses of 0.01%. If we extrapolate over the past 1 month, we can see a sharp appreciation in the Nikkei 225 index as it gained 8.76%. In the past 5 trading days, the Nikkei 225 has shed 1.29%.
On Wednesday, 27 July 2016 the index recovered by 1.83% following an announcement of fresh fiscal policy stimulus measures. The seesaw performance of the Nikkei 225 is to be expected given the extreme volatility that the Japanese yen has endured in 2016. At one point, the USD/JPY currency pair was trading close to 100:1, before a sharp appreciation of the greenback and a concomitant weakening of the JPY saw that depreciate towards 107:1. Presently, the USD/JPY currency pair is trading at 105.6270, up 0.8613% or 0.9020 Japanese yen. The year-to-date performance of the USD/JPY is -12.20% – a strong indication as to the strength of the JPY in 2016.
What is the state of the Japanese economy with the super-majority in the upper house?
Recently, Japanese Prime Minister Shinzo Abe’s party was buoyed by the July 10 win in the upper house. This gave fresh momentum to his plans to enact fiscal policy stimulus measures in Japan. On Wednesday, 27 July, the Prime Minister announced his strategic plan for a stimulus package valued at 28 trillion Japanese yen, equivalent to $254 billion. This news came ahead of the Federal Reserve Bank’s decision to maintain interest rates at their current level (federal funds rate) of 0.25% – 0.50%. The FOMC meeting began on Tuesday, 26 July and ran through Wednesday 27 of July.
Following this news, global stocks rallied across Europe. The Euro Stoxx 50 PR gained 1.14% by the late afternoon session to trade at 3012.84, the FTSE 100 index was up 0.73% at 6773.41, the German DAX index was up 0.85% at 10,334.82, the French CAC 40 index was up 1.56% at 4463.29 and the Spanish Ibex 35 index was up 1.74% at 8709.20. In Asia, the Chinese CSI 300 index was down 1.57% at 3218.24, the Hang Seng index was up 0.40% at 22,218.99, the Topix index in Tokyo was up 1.13% at 1321.67 and the MSCI AC Asia Pacific index was up 0.30% at 134.56. On Friday, 29 July 2016, the bank of Japan will be announcing its plans for quantitative easing. The fiscal policy measures adopted by the Japanese government will dovetail with monetary policy measures to help drive economic growth.
As yet, it is uncertain what investment spending will be adopted in Japan, but plans are likely in the pipeline. For the most part, stock markets across Asia closed significantly higher. Australia’s S&P/ASX 200 index ended the day flat at 5,539.70, and South Korea’s KOSPI index dropped 0.1% to close at 2,025.05. While the federal reserve bank may be inclined to raise interest rates at this juncture, it simply cannot do so. The global economy remains precariously balanced and a strengthening of the USD will certainly not help to stabilise markets. While other economies are weakening their currencies to try and boost economic growth, the US cannot move in the opposite direction. Many analysts are now expecting that the US will move on interest-rate hikes by the end of the year at the very least.
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