US Futures, Global Markets Storm Higher As More Details Emerge About Japan's "Helicopter Money"

The global meltup continues with the S&P set to open at new all time highs, some 20 points higher from yesterday's close, however the driver for the latest rally is not so much the imminent BOE announcement which is expected to cut rates by 25 bps from 0.50%, but a dramatic surge in the USDJPY just after 1am Eastern when Bloomberg revealed more details about Ben Bernanke's masterplan for Japan's helicopter money.

According to Bloomberg, Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. Abe advisor Etsuro Honda said that during an hour-long discussion with Bernanke in April the former Federal Reserve chief warned there was a risk Japan at any time could return to deflation. He noted that helicopter money could work as the strongest tool to overcome deflation, according to Honda. Bernanke noted it was an option. The implication, as we said last week when we previewed just this "big thing" is that Japan is indeed set to be the first testing ground of helicopter money in the modern financial system.

Though Honda said he thought Japan was already engaged in a strategy that involved helicopter money, he said that he watned to convey the idea to Abe and asked Bernanke to meet with the premier in Japan. While this didn’t happen in the spring, Bernanke joined central bank chief Haruhiko Kuroda over lunch this Monday and on Tuesday he attended a gathering with Abe and key officials, including Koichi Hamada, another influential economic adviser.

Honda, 61, said he told Abe about Bernanke’s views after his April meeting. “I told him now is the time for Japan to expand fiscal spending and at the same time, additional monetary easing should be taken,” Honda said. “I told him it is necessary to strengthen the effects of Abenomics” through such a strategy.

While nothing definitive has been revealed by Japan yet, bond, stock traders and economists have been mulling the possible implications of Bernanke’s visit and the next steps to come in Abenomics. Amid intense speculation about the chances of helicopter money, and the certainty of further fiscal stimulus ordered by the prime minister, Japanese shares have rallied for four consecutive days while the yen has weakened. The Japanese currency weakened sharply in late afternoon trading in Tokyo, and reached just shy of 106 around 6am ET, having soared nearly 600 pips in the past 4 days.

And with the Yen - the world's carry currency - plunging, global stocks have climbed with U.S. equity index futures.  European shares rose to a three-week high and emerging-market equities advanced for a sixth day. South Africa’s rand and Russia’s ruble were among the biggest gainers against the yen after a gauge of metal prices climbed to a nine-month high and oil rebounded from a two-month low. The pound advanced as traders awaited the Bank of England’s first interest-rate decision since the U.K. voted to leave the European Union.

“The expectations of a two-pronged stimulus approach -- both fiscal and monetary -- have definitely put the yen under pressure,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London.

Meanwhile, as Japan prepares to formalize helicopter money, the BOE is set to ease in a more conventional way in less than an hour: “Everyone is focused on the BOE and whether or not they will announce more stimulus and cut rates.”

The Stoxx Europe 600 Index rose 1 percent at 10:55 a.m. in London, paring its losses since Britain’s referendum on June 23. All industry groups in the gauge climbed, led by carmakers and commodity producers. The MSCI Emerging Markets Index added 0.7 percent in its longest winning streak since April. The gauge advanced to 8.6 percent this year and trades at the highest valuation in more than a year. The MSCI World Index of developed markets has gained 2.1 percent in 2016.  Futures on the S&P 500 Index added 0.8%. BlackRock and JPMorgan are scheduled to report earnings before the market opens. Yum! Brands Inc. jumped 3.1 percent as the company raised its forecast after its KFC chain performed better than expected in China. Analysts predict second-quarter profits will drop 5.7 percent at S&P 500 firms, which would make it the fifth straight quarterly decline, the longest streak since 2009.

Sovereign debt fell in the U.S., the U.K., Japan and Germany. The yield on U.S. Treasuries due in a decade rose two basis points to 1.50 percent, while that on Japanese debt increased by two basis points to minus 0.26 percent. Yields climbed four basis points in the U.K. and Germany to 0.78 percent and minus 0.05 percent, respectively.

Global market snapshot

  • S&P 500 futures up 0.8% to 2162
  • Stoxx 600 up 0.9% to 339
  • FTSE 100 up 0.8% to 6726
  • DAX up 1.5% to 10076
  • German 10Yr yield down less than 1bp to -0.07%
  • Italian 10Yr yield down 2bps to 1.19%
  • Spanish 10Yr yield down 2bps to 1.13%
  • S&P GSCI Index up 0.6% to 360.1
  • MSCI Asia Pacific up 0.2% to 133
  • Nikkei 225 up 1% to 16386
  • Hang Seng up 1.1% to 21561
  • Shanghai Composite down 0.2% to 3054
  • S&P/ASX 200 up 0.4% to 5412
  • US 10-yr yield up 2bps to 1.49%
  • Dollar Index up 0.08% to 96.29
  • WTI Crude futures up 0.6% to $45.02
  • Brent Futures up 0.6% to $46.53
  • Gold spot down 1.2% to $1,326
  • Silver spot down 0.9% to $20.17

Top Global Headlines:

  • Bernanke Floated Japan Perpetual Debt Idea to Abe Aide Honda
  • Fed’s Harker Says Two Interest-Rate Hikes May Be Needed in 2016
  • Volkswagen’s 3-Liter Car Recall Plan Rejected by California: Talks continue on how to fix VW, Audi, Porsche vehicles
  • Monsanto Said to Revive Talks With BASF on Bayer Alternative: Monsanto board said split over merits of Bayer, BASF deals
  • UBS, BofA Merrill Lynch Lead Wealth Managers With $3 Trillion: Volatile markets, ‘hesitating’ clients crimp industry assets
  • Google Said to Face Added EU Antitrust Charges, WSJ Reports: EU Commission accuses co. of breaching EU antitrust rules by imposing strict contractual terms with its advertising service
  • Wanda in Talks to Buy 49% of Viacom’s Paramount, WSJ Reports: Any agreement could face opposition from Sumner Redstone

We start the overnight update with Asian markets, where it was another mostly quiet session for equities with participants awaiting the Bank of England rate decision. Nikkei 225 (+0.95%) traded with modest gains to continue its 4-day winning streak amid source reports that fiscal stimulus worth around JPY 10tr1 could be announced later this month. Upside in ASX 200 (+0.43%) had been curbed by the decline in crude prices seen yesterday post DoE's, while a lacklustre CNY 20bIn liquidity injection failed to lift the Shanghai Comp (-0.22%) out of the red.10yr JGBs traded flat amid the continued upside seen in Japanese stocks while a disappointing 5yr auction in which the b/c, and average yield were lower than prior failed to have a significant impact on price action.

Top Asian News

  • Bernanke Floated Japan Perpetual Bonds Idea to Abe Adviser Honda: Prominent foreign economists drawn into nation’s policy making
  • TSMC Profit Tops Estimates as China Phones Make Up for Apple: Co. raised planned 2016 capex
  • Fast Retailing Cuts Profit Forecast for Third Time This Year: Stronger yen eroded Uniqlo-owner’s earnings from overseas
  • UBS Said to Have Flagged Suspicious 1MDB Transactions to MAS: Suspicious transactions prompt investigation of accounts involved
  • Great Eagle’s Lo Halts $330 Million London Project After Brexit: Group had planned to buy land in Shoreditch for Eaton Hotel
  • Singapore Exchange Says Won’t Resume Trading at 2pm Local Time: Shares including DBS Group, Singapore Airlines not trading

Much of the price action so far today took place as European participants arrived at their desks, with significant moves seen early on amid mounting expectations for BoE and Japanese stimulus, but light newsflow thereafter has led ti subdued trade as we move closer towards the BoE rate decision. European equities saw significant upside through the open and trade in firm positive territory (Euro Stoxx: +1.4%). In terms of a sector break down, the likes of financials, materials and energy names are the best performers, while the defensive sectors healthcare and utilities are the session's laggards. Italian banks Banca Monte dei Paschi and UniCredit lead the way higher in stock specific terms after Italian press reports suggested that a capital increase was on the card for both Co.'s. Despite much of the focus on macro news falling on the potential for further easing for the likes of UK and Japan, fixed income markets have been somewhat indecisive so far today, seeing initial downside before a turnaround by mid-morning. As such, by mid-morning Bunds are on the way to closing the opening gap and trading firmly back above the 167 level.

Top European News

  • Bank of England Rate Cut in Focus as Brexit Rattles Economy: Traders are pricing in about an 80% chance of a rate reduction
  • May Draws Line Under Cameron Era as Johnson Named to Brexit Team: May fires Osborne, appoints Hammond U.K. finance minister
  • Boris Johnson an Undiplomatic Pick as Britain’s Top Diplomat: Former mayor said Kenyan ancestry affected Obama view of U.K.
  • Deutsche Boerse Edges Closer to Investor Approval for LSE Deal: Shareholder approval rises to 53% -- near 60% minimum needed
  • Commerzbank Quarterly Profit Didn’t Improve, Handelsblatt Says: 1Q net income fell 52% to EU163m y/y
  • Credit Suisse Said to Lift Salary, Chop Allowance for Some Staff: Other lenders have made similar moves in response to EU rules

In FX, the biggest story remains the Japanese yen which weakened 1.1 percent versus the dollar, after earlier strengthening as much as 0.5 percent. The pound strengthened 0.6 percent to $1.3229, having touched $1.3338 on Wednesday, the highest since July 4. Sterling rallied even amid rising speculation that the central bank will cut its benchmark rate for the first time since 2009 to support the U.K. economy from the fallout of Brexit. Futures pricing shows the chance of a reduction at this meeting has climbed to 85 percent, compared with 11 percent on June 23, the day of the nation’s referendum.“Currency investors see a rate cut today as a done deal,” Valentin Marinov, head of Group-of-10 currency strategy at Credit Agricole SA’s corporate and investment-banking unit in London, wrote in a client note. “The BOE will struggle to exceed the already dovish market expectations and this will help the pound to consolidate in the aftermath of the meeting."

In commodities, West Texas Intermediate crude oil rose 1 percent to $45.20 a barrel, after tumbling 4.4 percent on Wednesday as U.S. data showed crude stockpiles fell an eighth week, the longest declining streak since June 2015.The LME Index of six base metals rose to the highest since Oct. 15 on Wednesday as nickel climbed on potential supply disruptions and copper advanced on speculation policy makers’ efforts to spur economic growth will boost demand for metals. Zinc and aluminum rose, while tin fell. Gold declined 1.2 percent to $1,327.12 an ounce, after gaining 0.7 percent in the last session. Corn increased 2 percent in Chicago, climbing for a third day as forecasts for hot and dry weather in the U.S. Midwest raised concern crop yields will deteriorate.

On today's calendar, in addition to the much anticipated rate cut by the BOE due out shortly, in the US we’ve got the latest weekly initial jobless claims number and also the June PPI report (market expectations are for +0.3% mom at the headline and +0.1% mom at the core). Fedspeak wise Lockhart (at 4.15pm) is set to opine this afternoon and George (6.15pm BST) later this evening. As we noted earlier JP Morgan highlights the earnings calendar while Delta Airlines is also due to report.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

  • European equities enter the North American crossover in positive territory with all eyes now firmly placed on the BoE at 1200BST/0600CDT
  • The median expectation for the BoE is for the bank to cut rates by 25bps but analysts are very much split in their views
  • Looking ahead, highlights include BoE Rate Decision, US PPI & Initial Jobless Claims & Earnings from JP Morgan & Blackrock

US Event Calendar

  • 7am: Bank of England Bank Rate, est. 0.25% (prior 0.5%)
  • 8:30am: Initial Jobless Claims, July 9, est. 265k (prior 254k)
  • 8:45am: Bloomberg U.S. Economic Survey, July
  • 9:45am: Bloomberg Consumer Comfort, July 10 (prior 43.5)
  • 10:30am: EIA natural-gas storage change
  • 11:15am: Fed’s Lockhart speaks in Victor, Idaho
  • 1:15pm: Fed’s George speaks in Oklahoma City
  • 7pm: Fed’s Kaplan speaks in St. Louis

DB's Jim Reid concludes the overnight wrap

The market is pricing an 80% chance of a 25bps cut today with economists a little more split as to whether they do or not (30 out of 54 are expecting a cut). DB's George Buckley thinks it's a close call but on balance believes the BoE will wait the extra three weeks until the August meeting when a lot more data will be available for the post referendum period. Supporting this he says that the comments from the BoE pre-referendum seemed to hint at waiting to tailor the response to the world that emerges after the vote. The BoE will be compiling the quarterly Inflation Report/analysis of the economy coinciding with the August meeting. He thinks delaying may be the preference and they can buy themselves time with a sufficiently dovish statement today. The markets have offered the BoE an opportunity not to rush given the recent rally. Politics may also be involved to some degree. Without knowing what the new administration's policy will be, a wait and see approach maybe gives them powder for a more comprehensive package down the line. It's a fine line though and we're highly likely to see action by the August meeting at the very least.

Staying with the UK, last night should remove any doubt that Brexit does indeed mean Brexit as new PM Theresa May appointed Brexit campaigners David Davies and Boris Johnson Secretary for exiting the EU and Foreign Secretary respectively. So the long roadmap to exiting the EU started being formulated as of last night.

Away from this, today brings the first key US earnings report of the season with JP Morgan reporting before market opening. That will kick start a run of quarterly bank reports that we’re due to get in the next ten days or so including Citi and Wells Fargo on Friday and BofA, Goldman Sachs and Morgan Stanley next week. Markets hit a bit of a brick wall yesterday with the recent rally showing some signs of fatigue so these upcoming earnings reports could provide a bit of direction again.

Indeed it was a large leg lower for Oil which weighed on sentiment yesterday. WTI plunged -4.38% yesterday and tested those Monday low’s again back below $45/bbl after the latest EIA data showed evidence of an unexpected increase in gasoline supplies last week. Energy stocks were under pressure as a result and it ended with the S&P (+0.01%) fluctuating between modest gains and losses and closing pretty much flat. The Stoxx 600 (-0.13%) closed just in the red although European Banks (Stoxx Banks -1.51%) and the FTSE MIB (-1.15%) stood out. That was actually despite some more positive chatter around Italian Banks with the news that a second bank support fund to supplement Atlante is being discussed.

Meanwhile, sovereign bond markets reversed some of their weakness this week with 10y and 30y Treasury yields in particular 4-5bps lower following a strong 30y auction. In another eye catching stat for the week, a new 10y Bund was issued yesterday with a negative yield (-0.05%) for the first time ever. It’s the first Eurozone 10yr sovereign bond to be issued with a negative handle yield and joins Japan as the second G7 member to do such.

As we flick over to the latest in Asia this morning, most major bourses are following the lead from Wall Street and Europe yesterday and trading with a relatively cautious tone, although the outlier is again Japan where the Nikkei (+0.76%) and Topix (+0.75%) continue to benefit from the elevated expectations that stimulus is around the corner. Elsewhere, the Hang Seng (+0.02%), Shanghai Comp (-0.36%), Kospi (-0.06%) and ASX (+0.35%) are a bit more mixed although moves have been modest. As expected the Bank of Korea kept rates on hold this morning, although they did move to cut growth and inflation expectations this year.

Moving on. There was a bit of Fedspeak for markets to take account of yesterday. Earlier in the day we heard from Dallas Fed President Kaplan (moderately hawkish) who said that the recent US employment report shows signs of making progress in reducing labour market slack but that a ‘slow, gradual, careful’ approach to raising rates is still appropriate. Kaplan added that there are two effects coming from the current slow GDP growth environment. He noted that it means that the Fed will ‘make progress on our dual mandate but it might be slower than it would be otherwise’ and that the other impact ‘is that the neutral rate is probably lower than it would be otherwise’. Meanwhile and speaking overnight, Philadelphia Fed President Harker (also moderately hawkish) said that he believes inflation will return to target sometime next year and that ‘I anticipate that it may be appropriate for up to two additional rate hikes this year and that the funds rate will approach 3% by the end of 2018’.

Staying in the US, datawise yesterday there wasn’t too much to add to the debate. Import prices rose a less than expected +0.2% mom in June (vs. +0.5% expected) with the YoY rate now at -4.8% from -5.0%. The June Monthly Budget Statement revealed a smaller than expected surplus during the month ($6.3bn vs. $19.0bn expected) with receipts down -3.9% yoy. Later in the evening the Fed’s Beige Book revealed that the US economy has expanded at a modest pace since mid-May and that ‘districts reporting on overall growth expect it to remain modest’. The text also suggested that labour market conditions were said to have remained stable with employment continuing to grow modestly and wage pressures remaining ‘modest to moderate’.

The Bank of England also released its Q2 credit conditions survey yesterday. The main take away from the summary was the reference to the outlook post-Brexit with the summary revealing that major UK lenders expect the availability of secured credit to be little changed in the near term but the demand for secured credit to fall. The text also revealed that the availability of credit to the corporate sector is expected to hold steady, although a further tightening is expected for the commercial real estate sector.

Before we look at today’s calendar and just wrapping up the data yesterday, France revised down their final June CPI print to +0.1% mom from +0.2%, although the YoY rate stayed as is at +0.2%. More notable was the weaker than expected Euro area industrial production report for May (-1.2% mom vs. -0.8%) which has resulted in the YoY rating fall to +0.5% from +2.2%.

Looking at the day ahead, this morning in Europe the overriding focus will of course be on the aforementioned BoE meeting at midday, especially with no data coming out of note. This afternoon in the US we’ve got the latest weekly initial jobless claims number and also the June PPI report (market expectations are for +0.3% mom at the headline and +0.1% mom at the core). Fedspeak wise Lockhart (at 4.15pm) is set to opine this afternoon and George (6.15pm BST) later this evening. As we noted earlier JP Morgan highlights the earnings calendar while Delta Airlines is also due to report.