No change from the Fed, and its steady as she goes.../Deja Vu , and not for the first time...

Thursday 28th April 2016

No change from the Fed, and its steady as she goes ..... No change from the BoJ either, but things are anything but steady

ref :- "Markets Get the Worst Kind of Kuroda Surprise as BoJ Stands Pat" , Bloomberg Online

Well, the Fed at least conformed to expectations ..... no change in rates and the door left open for a possible if not particularly likely hike in June (according to markets, anyway). There were some very subtle changes in the wording of Chair Yellen's post-decision statement but frankly nothing remarkable, not in comparison to what was to follow in Tokyo this morning. Fed Funds Futures had put the probability of a June rate rise at 20% before the event, and now indicate a probability of 21%  --  which tells you all you need to know about the shock value of the Fed's decision.

As for the Bank of Japan and its boss Haruhiko Kuroda .... well, that's another story. We said (on Tuesday, was it?) that a Bloomberg survey showed that 23 of 41 analysts had been expecting some kind of further stimulus. That's a majority, for sure (about 56%, in fact) but hardly an overwhelming one. From the market reactions to the decision to keep things on hold you'd think that expectations of additional easing had been universal, guaranteed even. Japanese equities plunged over 3% and the Jap Yen, whose strength many saw as the most important reason to lower rates, surged from about Y111.69 to its current 108.20  --  a huge move and a very unwelcome one.

Mr Kuroda is getting something of a reputation for springing surprises and on this occasion not in a nice way, according to some. But for all the genuine concerns about Yen strength, the disappointment may of course reflect how reliant some large elements of the marketplace are on central bank action to support asset prices  --  an oft-visited bugbear of ours. Actually, some of the talking heads this morning are suggesting that in countries like Japan, with an ageing population, it's reasonable to ask whether there's a limit to how far easy monetary policy and in particular negative rates can go and still be effective? Indeed, in this case have we already reached that point? Good questions, if slightly disturbing ones......

To be fair to Mr Kuroda, it would seem legitimate to want to wait enough time to see if the previous easing measures, considered bold at the time, are actually working. There is a natural time lag between implementation and effect and besides, one's got to remember that at heart the Bank of Japan is a fairly conservative institution. That probably won't save them from criticism if things don't improve, however. Growth numbers remain poor and there is no sign of any pick up in inflation anytime soon, particularly if the Yen remains strong. And whilst we're back on the Yen, Japan hosts a meeting of the G7 next month. Is it too Machiavellian to posit the theory that, despite the extreme reluctance of global authorities to enter OPENLY into any kind of old-fashioned currency accord, Japan might use the occasion to drum up some help on the foreign exchange front?

Deja Vu , and not for the first time ..... Is Greece the same old Greece ? And is Portugal about to become the new Greece?

ref :- "Athens' plea for emergency summit falls on deaf ears", The Financial Times

ref :- "Portugal's fragile recovery in hands of rating agency", The Financial Times

Just time to point you towards two articles in the FT. One will sound very familiar, whilst the other illustrates just how close to the cliff edge others are currently walking.

That Greece is facing a 3.5bn euro repayment in July unless PM Tsipras can close a deal with creditors on additional, deeply unpopular austerity measures sounds like an exact replay of events in 2015. To that end, he has asked Donald Tusk, the European Council President, to convene a summit of European leaders. It's a tactic he used successfully last year and as a result he feels that he is much more likely to get support from politicians than he is from the bean-counters. Mr Tusk denied the request and told the Greek PM to carry on dealing with finance ministers .... in other words, stick to the agreements. That's a problem for Mr Tsipras . The austerity measures that he's had to implement have caused a slump in his popularity ratings, which in turn means that much of the ammunition that he had last year, in the form of snap elections and referenda, are no longer at his disposal. Things look like they're unravelling again .... brace yourselves for a repeat performance.

Some people might find it more than a little disturbing that the immediate fate of a nation (or its solvency, at any rate) may hang on the decision of a rating agency. Tomorrow the Canada's DBRS will decide whether to downgrade its rating of Portugal's debt to below investment grade, as Fitch, Moody's and Standard and Poor's have already done. If it does so, Portuguese bonds will automatically be excluded from the ECB's QE bond-buying programme on which they have relied so heavily. The resulting leap in interest payable by the government would likely cut off the precarious recovery from the brink at its knees, which is assuming anyone wanted to buy their debt in the first place. Socialist PM Antonio Costa has so far danced a fine line between the austerity-driven demands of creditors and his far-left coalition partners, but unless he can continue to keep those partners in check (which frankly is looking a bit doubtful right now) it could all end in tears.

The betting JUST favours Portugal hanging on to DBRS' lowest investment-grade rating of BBB low ..... a lifeline perhaps, but for how long?