asset prices

Bank of Japan keeps policy settings unchanged – for now The BoJ has unanimously decided to maintain its ultra-easing monetary policy as it is still looking for clearer signs of sustainable inflation growth. We believe higher-than-expected inflation, a continued solid economic recovery, and growing pressures from the weaker yen will eventually convince the bank to revise its YCC policy in July.   The Bank of Japan's no change decision was very much in line with market expectations The Bank of Japan's (BoJ’s) monetary policy statement hasn’t changed much at all on its view on the growth and inflation outlook and hasn’t given a hint of any exit plans. The BoJ kept its dovish stance by repeating that “the bank will not hesitate to take additional easing measures if necessary”. What is more worth noting, however, is that the BoJ pointed out that wage gains are expected, accompanied by changes in firms’ price and wage-setting behaviour. We believe that this is the change of structural and behavioural disinflation factor that the BoJ has been looking for.   To be precise, the latest labour cash earnings data were disappointing despite the surprisingly solid Shunto (Spring wage negotiations) results. Thus, an improvement in earnings is another factor to watch to gauge the BoJ’s policy action and we will also see how earnings data unfold in the coming months. We believe that rising asset prices are another important factor in sustainable inflation. With recent rallies in Japanese equity markets and the gradual rise in housing prices, the positive wealth effect is likely to keep inflation above the BoJ’s target, in our view.   Dovish comments from Governor Ueda Governor Kazuo Ueda’s comments at the press conference were no different from what the statement suggested. Ueda is concerned that the outlook for wage growth is highly uncertain and wants to see clearer signs of sustainable inflation. There were no hints about future policy adjustments in his comments.   However, we still think that the BoJ can change its YCC policy in July for the following reasons: First, the BoJ is likely to upgrade its inflation forecast in the quarterly outlook report in July. That could more easily justify the BoJ’s policy action. As mentioned previously, we expect inflation to remain higher for longer than expected.   Second, the overall bond market functions have improved, although there have been some fluctuations since December’s YCC band widening, and the market is not testing BoJ’s YCC upper limit of 10Y JGB. Thus, we believe that the market stress has been reduced, and it is a good time for the BoJ to revisit its YCC policy to reflect changes in market conditions.   Third, a weaker yen will likely add more inflationary pressures. If the BoJ continues to maintain its current policy setting, it would risk leaving the BoJ “behind the curve”. We believe that Japan’s economy is recovering solidly compared to other major economies and will continue to outperform in the future. But, if monetary policy fails to reflect this shift of economic fundamentals and the BoJ keeps its dovish policy, then the yen should depreciate even more.Lastly, by the time of the July meeting, the US Federal Reserve will have already decided on monetary policy, and where the UST will be is another factor the BoJ should consider.   From now on, we will be closely watching upcoming data releases such as June Tokyo CPI, labour cash earnings, and the movement in JPY, to see if these give a clearer signal of sustainable inflation.

Despite the fact that the European Central Bank has much more reasons to consider lowering interest rates compared to the Federal Reserve, the ECB not only raised the refinancing rate but Lagarde practically stated that there would be another rate hike in July. This decision not only contradicts expectations but also goes against common sense to some extent. Of course, this resulted in the dollar's decline, thereby reducing the pressure caused by its apparent overbought condition. However, the European economy is facing serious difficulties associated with the increased cost of energy resources.   The European industry suffers the most. Many, including in the West, are already openly calling what is happening the deindustrialization of Europe. And a strong dollar may somewhat alleviate this negative trend. So, the decisions and intentions of the ECB are more harmful than beneficial to the European economy. Especially considering that inflation in the euro area is slowing down as fast as in the United States. Today's inflation report should confirm the fact of its slowdown from 7.0% to 6.1%. And don't think that the ECB was unaware of this yesterday because we are talking about final data.   The preliminary assessment was already available two weeks ago. In such a situation, the most reasonable approach would have been not to touch interest rates and observe the developments for at least two or three months.   Frankly speaking, the ECB's actions are raising more and more questions. And this naturally leads to an increase in concerns, which are usually referred to as uncertainty risks. Investors typically try to stay away from such risks. Therefore, the euro's substantial growth, which pulled the pound along, is likely to be unsustainable and probably won't last long. The GBP/USD pair has surged in value by nearly 300 pips since the beginning of the trading week.     This movement has resulted in the extension of the medium-term uptrend. Take note that such an intense price change has triggered a technical signal of the pound's overbought conditions. On the four-hour chart, the RSI is at its highest level since autumn 2022, indicating a technical signal of overbought conditions.   On the same timeframe the Alligator's MAs are headed upwards, which points to an upward cycle. Outlook In this case, speculators are disregarding the overbought status, as evidenced by the sustained momentum and the absence of a proper correction. However, this process cannot persist indefinitely, and sooner or later, there will be a liquidation of long positions, leading to a pullback. Until then, traders will consider the psychological level of 1.3000 as the main resistance level.  

2. A lack of liquidity could exacerbate financial market stress Liquidity risks can come in different shapes and forms. In its 2023 Financial Stability Report, the IMF highlights several types of NBFI vulnerabilities linked to liquidity. NBFIs tend to have a liquidity mismatch by holding relatively illiquid assets while sometimes allowing investors to redeem shares daily. This practice is not new as pre-2008, shadow banks were already making use of such a mismatch. The recent evolution in the sector highlights an increase in the liquidity mismatch of the assets held by NBFIs. Looking into the vulnerability measure capturing weighted average funds owning an asset and defining liquidity as the portfolio-level bid-ask spread across funds, the following graph from the IMF clearly highlights this point. It shows the spike in vulnerability to liquidity mismatches as Covid hit but also the more recent increase. While not as significant as the spike seen during the pandemic, recent trends are a reminder that the sector is still vulnerable to changes in liquidity, which can often worsen in times of stress   Average liquidity mismatch has increased since the Covid crisis The liquidity mismatch index, which spiked in 2020 and again over 2022, is now showing a decline     Furthermore, the combination of financial leverage and lack of market liquidity can lead to a decline in asset prices and a deterioration of funding liquidity (liquidity spiral). For most NBFIs, there is a risk that investors withdraw funds, especially when asset values drop, although for some there may be notice periods to negotiate. For example, hedge funds traditionally have a lockdown period under which there can be no withdrawals. If enough forced selling occurs, it adds to the pressure on the asset side, resulting in something of a death spiral.

US crude clears important resistance.  US crude cleared the all-important 50-DMA yesterday. The barrel of US crude trades a touch below the $72bp level this morning. The next important resistance is seen near $73.50, where stands the 100-DMA.     There is a big fight going on between OPEC – who is ready to do anything to push oil prices above $80pb, and the oil bears, who aggressively fight OPEC and sell any price peak that follows an OPEC-led rally. But the persistent production cuts will at some point become a fundamental problem. And the longer the bears fight OPEC and the more OPEC cuts production, the more severe the impact on global oil glut, and the higher the risk of a decent jump in oil prices.     Yet another rally in energy prices would again interfere with the central banks' fight against inflation and get them to further tighten their policies. And that would apply further pressure on global economy and on asset prices.     A soothing argument is that energy prices cannot rally infinitely when the world is so sensitive to inflation because recession worries will rapidly wane the energy rally and settle the prices at reasonable levels. So even with the most optimistic scenario for oil, there is little chance we see oil prices spike above $90pb. Maybe we could get to the $80bp that will make Saudis happy, though.   

The world of technology continues to evolve rapidly, with new trends and concepts emerging. One such concept that has gained attention is the metaverse, a virtual universe where people can interact and engage in various activities. However, recent data from DappRadar reveals a surprising trend: investments in the metaverse have accounted for a mere 10% of the figures recorded during the same period in the previous year. This raises questions about the future trajectory of metaverse technology and its place in the investment landscape. To gain insights into this evolving landscape, we turn to Simon Peters, a Crypto Market Analyst at eToro. According to Peters, the first half of the year has been dominated by the buzz surrounding artificial intelligence (AI). Companies involved in AI, such as NVDA and META, have seen impressive performance in the market. This shift in focus from the metaverse to AI-related projects may have had a negative impact on the prices of metaverse-related crypto tokens.      FXMAG.COM: Data from DappRadar shows that in the first half of 2023, investments in the metaverse barely accounted for 10% of those in the corresponding half of the previous year. What's next for metaverse technology?   Simon Peters, Crypto Market Analyst at eToro, said: AI has been the 'buzzword' in the first half of the year. From NVDA to META, companies with exposure to AI have typically been the best performers this year. Perhaps investors' focus has shifted away from the Metaverse to more AI related projects and this, in turn, has negatively affected the price of Metaverse related crypto tokens. Price direction will be tied to the macroeconomic climate. Factors including cooling inflation, a pause in interest rate hikes and advancement in crypto regulation could be positive for asset prices in the near future. Nevertheless, the concept of the metaverse is still very much in its infancy. With more and more people shifting towards remote working and spending more time online, this space has massive potential.  

The Norwegian economy and the actions of the country's central bank, Norges Bank, have been closely observed amidst the challenges posed by inflation and its impact on the Norwegian krone. In light of the latest data from the Norwegian economy, market participants eagerly seek insights into the central bank's response and its implications for the currency.   According to Jakob Westh Christensen, eToro Nordic Market Analyst, Norway took early action in addressing inflation concerns. When inflation emerged globally towards the end of 2021, the ECB and the Fed viewed it as transitory and delayed taking action. In contrast, Norges Bank promptly implemented its first interest rate hike in September 2021. Although the country has managed to keep inflation below double-digit levels experienced by other European nations, recent data paints a concerning picture. In May, inflation in Norway rose to 6.7% from 6.4% the previous month, indicating a worrying upward trend.     FXMAG.COM:  How would you comment on the latest data from the Norwegian economy and the actions of the central bank there, and what about the Norwegian krone as a result?    Jakob Westh Christensen, eToro Nordic Market Analyst said: Towards the end of 2021, when inflation began to emerge around the world, and the European Central Bank (ECB) and the Federal Reserve (Fed) saw the inflation as transitory and failed to act, Norges Bank (Central Bank of Norway), acted promptly by implementing its first interest rate hike in September 2021. Despite successfully keeping inflation below the double-digit levels experienced by many European countries, the Scandinavian country has yet to witness the same decline in inflation as most other countries are currently experiencing. On the contrary, the latest data shows a concerning increase in May, with inflation rising to 6.7% from 6.4% the previous month. Thanks to its self-sufficient energy production and government support, Norway has been shielded from the severe energy price spikes that affected many other European countries. But their tight labour market and the weak currency continue to fuel inflation. The country, with a population of 5.5 million, has a tight labour market with an unemployment rate of just 3.5%, experiencing robust wage growth. At the same time, the depreciation of the Norwegian krone against the US dollar and the euro further complicates the situation for the import-dependent economy, driving up the costs of everyday imported goods. The decline in oil prices explains part of the oil-exporting nation’s weakened currency. But also, the diminishing interest rate differential with major economies like the US and the Eurozone reduces the attractiveness of holding the Norwegian currency for investors. To counter the weakening of the Norwegian krone and combat inflation, Norges Bank raised the policy rate by 0.50 percentage points to 3.75% in late June, providing some support for the currency. However, the central bank acknowledges that the fight is far from over and has indicated the likelihood of another rate hike at the upcoming meeting in August, with the policy rate potentially rising to 4.25% during the autumn. While Norges Bank was the first to enter the battle against inflation, it might turn out that they will also be the last to leave it.  

China’s latest activity data worsened across nearly every component. Markets have given up looking for fiscal stimulus, and have started making comparisons with 1990s Japan. We don’t agree with the Japanification hypothesis, but clearly a substantial adjustment is underway, and we have trimmed our growth forecasts accordingly.   Deflation is very different to this A couple of weeks ago, we wrote a piece debunking an argument that was doing the rounds which argued that China had slipped into deflation and was turning into a modern-day equivalent of 1990s Japan. Being old enough to remember that period quite well (unlike I imagine most of the proponents of the idea), it was clear to us that there was no merit to this view. Firstly, deflation is not negative consumer price inflation. Deflation is a much broader collapse in the general price level, which, in addition to consumer prices includes falls in real and financial asset prices, as well as money wages. And though we have seen some renewed falls in house prices, stocks are not looking very robust, and there is indeed some year-on-year decline in consumer prices, however, money wages are still positive. Moreover, the single defining feature of 1990s Japan was that it was the result of a monetary-induced bubble and subsequent bust. There was a property element to Japan's problems, but much more besides. Japan's response was a massive fiscal expansion, which failed to do much more than saddle the economy with a mountain of debt, and the rest is largely history. China’s issues also concern the property market, but it is the existence of large-scale local government debt that is the main constraint on the recovery. There is little evidence of any financial or property bubble. As a result, the government responses, of which there have already been a great many, have almost entirely focused on supply-side measures, which are only having a very marginal effect on activity.     Local government financing vehicles swell government debt    

At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. We expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   At the G20 New Delhi Summit, the leaders of key economies agreed that “headwinds to global economic growth and stability persist” and shared concerns of a potential global economic slowdown. The BoJ seems to be maintaining the view that “there are extremely high uncertainties for Japan's economic activity and prices, including developments in overseas economic activity and prices, developments in commodity prices, and domestic firms' wage- and price-setting behavior”. In order to pull Japan completely out of deflation, the BoJ seems ready to be one policy cycle behind key central banks in starting the normalisation process. As long as markets are pricing in a Fed rate cut sometime next year, the BoJ will likely continue with the current monetary easing policies. We continue to expect the BoJ will likely start the normalisation process by exiting from the YCC framework in 2025, once the global economy enters the next cyclical recovery. Meanwhile, we expect the government to maintain its commitment to the current accommodative fiscal/monetary policy framework even after the PM Fumio Kishida reshuffles the cabinet and LDP leadership. The government will likely maintain its accommodative fiscal policy stance under the banner of “new capitalism” to further stimulate investments and in turn economic growth. With many key ministers having experienced posts within METI, the government’s fiscal policy stance will likely focus on stimulating the economy rather than balancing the budget. With the government maintaining a strong commitment to the Abenomics policy framework, the BoJ will likely remain cautious of any major policy changes in order to not repeat past mistakes of premature policy tightening. On the other hand, the risk scenario is if the global economy remains resilient and markets stop pricing policy rate cuts by key central banks next year, the BoJ could start the normalisation process in 2024 under the assumption that the global economy will continue to remain strong.   The main scenario is that the central bank policy tightening cycle is approaching its end and the global economy will show stronger signs of slowing down as the cumulative effects of policy rate hikes so far suppress demand and dampen inflationary pressures. An economic slowdown and expectations for interest rate cuts by key central banks including the Fed will likely strengthen downward pressure on global bond yields and give the BoJ room to reduce its JGB purchases while maintaining the current YCC framework.   Based on the latest US financial accounts, the household savings rate (net asset change as percentage of GDP) seems to have bottomed out at around 2.2% of GDP in Q422, and has increased since then to 4.4% as of Q223. The household savings rate rising again combined with economic data showing signs of weakness and weaker inflationary pressures is likely the basis in which many market participants continue to see a soft-landing scenario as their main scenario.   The upside risk scenario is that the global economy remains resilient and inflationary pressures remain. Under such a scenario, central banks will be forced to continue tightening monetary policy and market expectations of a policy rate cut in 2024 would disappear. In such a scenario, upward pressure on JGB yields would strengthen and the JPY would weaken further. The BoJ will likely be forced to adjust or abandon YCC in such a scenario. However, to finance the continued increase of consumption activities, households will be forced to sell assets which will likely lead to a peak in asset prices. Combined with higher policy rates, the economy could face strong headwinds in such a scenario and an upside risk scenario could be followed by a hard landing scenario   The downside risk scenario is that the effect of cumulative rate hikes by central banks so far appears much stronger than anticipated. Under such a scenario, businesses will likely strengthen their cautious attitudes and lead to a much stronger-than-expected deleveraging move. Central banks will likely be forced to respond by cutting policy rates at a much faster pace than anticipated. In such a world, the JPY would likely appreciate significantly and the risk that Japan falls back into deflation will likely strengthen. The BoJ will likely be forced to respond by implementing additional easing measures, such as further cuts to its negative interest rate policy, while implementing measures to alleviate the side effects of further easing policies simultaneously. Under such a scenario, the global economy could fall back into a deflationary state but we believe the likelihood of such a scenario materialising at this juncture remains small        

Southern Europe to feel the most lingering pain this year from ECB rate hikes The impact of last year's ECB rate hikes is set to have a bigger impact on southern than northern eurozone countries in 2024, according to our research. Asset prices and investments in the south have outperformed those in the north. But rapidly declining borrowing now suggests that that's about to change, not least because debt is rising rapidly   Southern eurozone countries have largely defied the impact of ECB rate hikes up to now While expectations initially were that southern European countries would face significant problems if the European Central Bank were to raise rates aggressively, this has yet to materialise. In fact, it seems to be the other way around: several indicators point to a stronger transmission of tighter monetary policy on northern and not southern European countries. Take the stock market, where performances in northern European main indices have been weaker than in the south. The Euro Stoxx 50 turned down in December 2021 as long-term yields started to increase globally. Since then, the German and French main indices have been up 5%, and the Dutch AEX is down 1.4%. But in Spain, Italy, Greece, and Portugal, the main indices have surged by 16, 11, 45, and 15%. Price developments in the housing market also point to a larger impact in northern Europe. Germany, Netherlands and France have seen house prices fall below their recent highs, while Italy, Spain, Portugal and Greece still experience increasing house prices, according to the latest available data.  The surge in investments in Southern European countries is remarkable. Admittedly, there is more to investment than just interest rates; think of the impact of the Recovery and Resilience Fund and possibly the delayed impact of low interest rates and the search for yield, as well as successful structural reforms. Still, investments in Southern European countries increased by some 15% since late 2020, while investments in core countries increased by less than 5% in the same period. We think a change is on the cards.    Investment and house prices have outperformed in southern Europe   Differences in transmission are starting to show As we argued in this recent piece, the pain of monetary tightening is likely to be felt more in 2024 than last year due to the long and variable legs of monetary policy transmission. It just takes a while before the impact of tightening really impacts the economy. There is increasing evidence that the transmission of monetary policy in 2024 will be less favourable for southern European economies. Take the most recent lending data. Lending volumes are currently falling in most southern European economies. In Italy, it's looking really rather serious as the 6% year-on-year fall of borrowing by non-financial corporates is worse than during the Global Financial and euro crises. Spain, Portugal and Italy see declining borrowing volumes for both households and corporates, while northern European economies are still seeing year-on-year growth in borrowing. Belgium and France do particularly well among larger markets, while Germany and Netherlands see stagnation. The differences in lending do not stem from differences in bank rates for new loans, as these don’t diverge materially.   Bank lending growth is diverging quickly, likely resulting in weaker periphery investment