Yen Soars, Stocks Slide After Kuroda Says "No Need Or Possibility For Helicopter Money"

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 releaesed.


“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.”

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

Global Headline News

  • Kuroda Says No Need and No Possibility for Helicopter Money: Central bank Governor Haruhiko Kuroda spoke in BBC Radio 4 program
  • Japan’s Komatsu to Buy U.S. Joy Global for $2.89b: Komatsu to pay $28.30 a share in cash, 20% premium to close
  • Tesla’s Musk Sees Building Semi Truck in New ‘Master Plan’: CEO plans business expansion to include ride-sharing, buses
  • Singapore Seizes S$240m in Assets Related to 1MDB Probe: U.S. seeks also to seize assets linked to 1MDB
  • Shenhua Said to Seek CGN Merger to Form $204b Giant: China’s top coal miner said to submit proposal to regulators
  • Exxon in Catbird’s Seat for InterOil as Oil Search Drops Out: Exxon bid values Papua New Guinea gas explorer at $2.5b
  • Qualcomm Shows China Progress While Intel Stokes Server Fears: Intel’s data center business lags behind growth target, Qualcomm gets catch-up licensing payments, more chip orders
  • Oil Extends Gains as U.S. Stockpiles Fall, Refinery Rates Rise: September futures added 0.5% in New York after gaining 0.7% Wednesday
  • Trump Chooses War With Cruz at Convention Aimed at Unification
  • LVMH Said to Be in Talks to Sell DKNY, DKI: New York Post

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Looking at regional markets, we start in Asia where a positive picture was observed, following the latest record advance seen on Wall Street after a rally in WTI and strong financials led US higher. Nikkei 225 (+0.8%) was catapulted back into positive territory by reports that the government are preparing an additional JPY 9trl in fiscal spending to accompany the earlier reported JPY 10TRN package, however after the close Kuroda dashed Nikkei futures with his statement that helicopter money is "not possible." ASX 200 (+0.6%) extended on its progress from yesterday's session with widespread gains seen across sectors, although materials still lagged behind. Elsewhere, Chinese markets conformed to the upbeat tone with the Hang Seng (+0.5%) in the green, while new measures to boost the economy in China bolstered the Shanghai Comp (+0.4%). 10yr JGBs trade flat as the benefits from the BoJ entering the market to acquire JPY 1.135tr1 of government debt was capped by the bullish pressure in Japanese equities. According to sources, the Japanese government is said to be preparing an additional JPY 9trl in fiscal spending to accompany the reported JPY 10trl package and could be given the green light before the August 2nd cabinet is approved.

Top Asian News

  • China Factory Gauge Suspended Again, This Time ‘Indefinitely’: Two indicators of Chinese economy have been discontinued
  • PBOC Strengthens Yuan Fix Most in Three Weeks Amid Support Bets: Yuan trade-weighted basket advances most since February
  • Yen Collapse Seen by Kuroda Critic Pitching Perpetual Bond Plan: Japan addicted to stimulus that isn’t working, Mitsuru Iwamura says
  • Chinese-Owned Key Safety Systems Said to Plan Bid for Takata: Japanese co. is seeking buyers to tide over record air-bag recall
  • RBNZ Says Likely That Further Policy Easing Will Be Required: Reserve Bank of New Zealand says decline in exchange rate is needed

Comments from BoJ's Kuroda have shaped the European morning, with the central bank head stating that there is no need or possibility for helicopter money. In terms of a sector breakdown, airlines were among the worst performers in Europe after downbeat updates from both EasyJet and Lufthansa, while energy names also softened. Although USTs saw upside in the wake of Kuroda's comments to head into mid-morning outperforming their European counterparts, with Bunds remaining relatively stable as participants await the ECB rate decision. Some have speculated that the ECB could alter the makeup of their asset purchases given the recent increase of bond yields slipping lower.

Top European News

  • Draghi May Flag Action Ahead for ECB Under Brexit’s Shadow: President will likely address fallout from U.K. referendum
  • Brexit to Halt U.K. Growth Streak With Mild Recession Seen: Survey of economists shows economy shrinking from this quarter
  • Lufthansa Cuts Profit Forecast After European Terror Attacks: Terror fears depress demand for long-haul trips to Europe
  • Publicis Chief Levy Sees Clear Improvement in 2017; Shares Rise: 30 years at the helm of ad firm, Levy plans to step down
  • U.K. Retail Sales Fall 0.9% in Month of Brexit Referendum: Monthly survey captures week following shock vote to leave EU
  • Daimler’s Mercedes Sustains Margins and Sees Boost From E- Class: Adjusted profit margin was 10% at Mercedes-Benz Cars division

In FX, the yen jumped 1.3 percent to 105.54 per dollar after Kuroda's no helicopter money remarks. Speaking in a BBC Radio 4 program broadcast Thursday, Kuroda also repeated that he is determined to rid Japan of its deflationary mindset and that there are no significant limitations to further monetary easing if needed by the Bank of Japan. The euro was little changed at $1.1020. ECB President Mario Draghi has predicted that euro-area growth will slow as a result of Brexit, suggesting a response is needed. “Draghi will keep his options open for further easing,” helping fuel a gradual decline in the euro amid broad dollar strength, said David Forrester, a foreign-exchange strategist at Credit Agricole SA’s corporate and investment-banking unit in Hong Kong. “The yen has already sold off a lot in anticipation of the government’s fiscal stimulus package and next week’s BOJ meeting. We’re looking for it to continue tracking lower.” The Bloomberg Dollar Spot Index fell 0.2 percent, after four days of gains. A Citigroup gauge that tracks the degree to which American economic data are exceeding projections is at an 18-month high and futures put the chance of a Federal Reserve interest-rate increase this year at 47 percent, up from 9 percent at the end of June.

In commodities, oil for September delivery was little changed at $45.78 a barrel in New York after weekly U.S. government data showed crude stockpiles fell for a record ninth week and refining activity climbed to a 2016 high. Gold rose 0.5 percent to $1,322.34 an ounce

On today's US calendar we have initial jobless claims as well as Philly Fed manufacturing survey for July. Existing home sales data and the FHFA house price index reading are also due out, along with the Conference Board’s leading index for June. In terms of corporate earnings we’re due to hear from 35 S&P 500 companies including General Motors (before market), AT&T (after market) and Schlumberger (after market).

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Bulletin Headline Summary from RanSquawk and Bloomberg

  • There is no need and no possibility of helicopter money in Japan, central bank Governor Haruhiko Kuroda said; An increasing number of officials at the Bank of Japan are concerned about the sustainability of the current framework for massive monetary stimulus, according to people familiar with the discussions
  • Treasuries little changed in overnight trading as Asian equities rise on Koruda’s dismissal of “helicopter money,” European stocks fall prior to ECB policy meeting.
  • While action isn’t seen as likely straight away, when Draghi addresses reporters after the ECB meeting he might signal more stimulus to be deployed in September
  • BOE’s Kristin Forbes said there’s no need to hurry to add stimulus after the U.K.’S vote to exit the European Union, citing a moderation of the immediate market turmoil, calm consumers and “quite solid” growth before the referendum
  • More Fed officials are making it clear with greater urgency that they need help from elected lawmakers. In June, Fed Chair Janet Yellen told the Senate Banking Committee that fiscal policy had “not played a supportive role”
  • Goldman Sachs, JPMorgan Chase and Morgan Stanley collectively reduced the amount of money they set aside for employee pay in the first and second quarters by 17%, the most in at least four years, to $19 billion
  • Terrorism in France, Brexit in Britain, a coup in Turkey -- political convulsions everywhere. So where’s the hot money going? It’s going to the world’s riskiest markets, where at least investors are getting paid for the risks
  • Singapore vowed to take action against four banks for what it called serious lapses in their anti-money laundering controls and seized S$240 million ($177 million) in assets linked to the financial institution known as 1MDB
  • The political instability in Turkey threatens to add to an already difficult year for the nation’s banks as they contend with a 33% surge in bad loans and soaring bankruptcy filings

Event Calendar

  • 8:30am: Chicago Fed Nat Activity Index, June, est. -0.2 (prior -0.51)
  • 8:30am: Initial Jobless Claims, July 16, est. 265k (prior 254k); Continuing Claims, July 9, est. 2.137m (prior 2.149m)
  • 8:30am: Philadelphia Fed Business Outlook, July, est. 4.5 (prior 4.7)
  • 9:00am: FHFA House Price Index m/m, May, est. 0.4% (prior 0.2%)
  • 9:45am: Bloomberg Economic Expectations, July (prior 41); Bloomberg Consumer Comfort, July 17 (prior 44.7)
  • 10:00am: Existing Home Sales, June, est. 5.48m (prior 5.53m); Existing Home Sales m/m, June, est. -0.9% (prior 1.8%)
  • 10:00am: Leading Index, June, est. 0.2% (prior -0.2%)

Central Banks

  • 7:45am: ECB Main Refinancing Rate, est. 0% (prior 0%)

DB's Jim Reid concludes the overnight wrap

With little else to feed off, a steady stream of better than expected corporate earnings results continues to keep the tone in markets on the positive side for now. Reports out of Microsoft (post Tuesday’s close) and Morgan Stanley (prior to the open yesterday) kept the train chugging yesterday and once again helped Wall Street and the S&P 500 (+0.43%) and Dow (+0.19%) to new record highs. That said the actual intraday moves have been incredibly small recently - perhaps also reflecting a bit of early summer fatigue - with the intraday high to low range for the S&P 500 yesterday just 0.50%. In fact since the 11th July the average daily intraday range has been just 0.51% despite the index closing up in six of the eight sessions. This month the index has actually only had a daily range above 1% on two occasions. Compare that to the excitement in June where the average daily range over the entire month was 1.06%.

The ECB has the potential to shake things up today though when we’ll get the outcome of their policy meeting at 12.45pm BST. In a nutshell our European economists believe that it’s a close call, but on balance the ECB will wait until the September meeting before easing again, with the focus on extending QE. A few factors lead them to this. Firstly, they note that based on press reports, the ECB sees a smaller impact from Brexit than they do and that it would require negative data surprises if the ECB is to converge to our economists view, for which the data generally hasn’t been available since the Brexit vote. Secondly, the ECB is confident about the benefits of the policies it has implemented and believes the benefits from recent policy announcements like the TLTRO2 and CSPP will be slow to accrue. Thirdly, by waiting until September the ECB will have the benefit of additional information on the Brexit impact and the benefits of its new policies. It will also have the benefit of updated staff forecasts. They note that the ECB dislikes being under pressure to reconsider the policy stance at every meeting and has a tendency to coordinate action with the analysis accompanying new staff forecasts.

That said the scale of the Brexit impact is uncertain but negative. The ECB’s room for manoeuvre on policy is constrained by the political nature of the Brexit shock and the side-effects of further easing. In that case, the sooner the ECB acts the better. On top of this, the decline in European bank equity is a concern and another important factor to consider. So this makes the call a bit of a closer one.

Staying on this subject, yesterday our strategists published a note taking a look at the potential technical changes in QE purchases which could be introduced alongside an extension, including increasing issuer limits, removing the yield floor and deviating from capital keys. They assess how this could impact bund and peripheral spreads in particular should Draghi provide some meaningful indication at the press conference.

Elsewhere, the fallout from the failed coup in Turkey on the weekend continues. Yesterday evening President Erdogan declared a three-month state of emergency in the country. According to the FT officials in Turkey have said that this will allow the government to pass laws rapidly, however there will be no financial or commercial activity restrictions. Meanwhile the Turkish Lira weakened another -1.56% yesterday and to a fresh historic low after S&P cut the sovereign’s rating by one notch to BB with a negative outlook. The start of the week also saw Moody’s put Turkey’s Baa3 rating on review for downgrade. With Fitch (BBB-/Stable) still at IG that Moody’s move is the most important development given the possibility now of Turkey losing its IG status (with most global indices/index trackers requiring at least 2 IG ratings for a credit to be classified as IG). DB’s Seb Barker published an interesting note yesterday discussing the implications for the credit following this news.

Switching over to the latest in Asia this morning where bourses are generally following the lead from Wall Street last night. The Nikkei (+0.71%) in particular has bounced back, with a weaker Yen (-0.50%) this morning helping. Meanwhile the Hang Seng (+0.75%), Shanghai Comp (+0.69%) and ASX (+0.60%) are also up. US equity index futures are also a smidgen higher, helped by eBay’s better than expected results after the closing bell last night which saw shares climb as much as 8% in extended trading. In the FX space the Kiwi Dollar is down half a percent or so after the RBNZ strengthened its easing bias in an economic update overnight.

Moving on. In terms of the rest of markets yesterday, European equities also had a decent day yesterday with some corporate earnings results there also helping. German software maker SAP stood out while Volkswagen also provided some positive earnings guidance which helped sentiment to remain fairly positive. The Stoxx 600 closed up +1.03% while sovereign bond markets eased off, with yields edging up a few basis points.

Meanwhile, in what was another fairly quiet day for data yesterday the notable release was the European Commission’s flash consumer confidence report for July which weakened 0.7pts to -7.9 and more or less in line with expectations. Unlike the German ZEW survey from earlier in the week it’s hard to argue that the Brexit result has had a material detrimental impact on confidence given that data. Indeed the absolute value of the index was weaker in February-April earlier in the year. Elsewhere there was also some data out of the UK, albeit pre-Brexit. The ILO unemployment rate was reported as nudging down one-tenth to 4.9% (expectations had been for no change). The last time unemployment was this low was in 2005. Average weekly earnings including bonuses rose +2.3% yoy in the three months to May (from +2.0%) however ex bonus earnings were down one-tenth to +2.2%.

Before we look at the day ahead, there was a bit more chatter out of the BoE yesterday too. In an article on the Telegraph website, policy maker Kristin Forbes said that ‘given the substantial uncertainty and likelihood that growth slows, there is a valid case to ease monetary policy to support demand’. She did however go on to say that ‘but until more hard data is available, I believe this is a good time to keep calm and carry on’.

Looking at today’s calendar, this morning we’re kicking things off in France where we’ll get the latest confidence indicators for July. The UK will then report June retail sales data before focus of course turns to the ECB meeting just after midday, with Draghi scheduled to speak after at 1.30pm BST. Meanwhile there’s a bit of data to highlight out of the US this afternoon. Initial jobless claims is the early release along with the Philly Fed manufacturing survey for July. Existing home sales data and the FHFA house price index reading are also due out, along with the Conference Board’s leading index for June. In terms of corporate earnings we’re due to hear from 35 S&P 500 companies including General Motors (before market), AT&T (after market) and Schlumberger (after market). We’ll also get reports from 12 Stoxx 600 companies.