Julius Baer: Bank of Japan, Bank of England, petróleo y agricultura

Redacción - Martes, 27 de Septiembre

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ECONOMICS Bank of Japan invites Abe to spend

• Financial market reaction to the latest BoJ action expresses extreme scepticism that its latest policy shift will reflate the economy.

• Targeting a 0% yield level, allowing inflation to overshoot and coordinating with fiscal policy give the Abe administration a free hand to reflate the economy.

 

The financial market reaction to the meeting of the Bank of Japan (BoJ) last week suggests that the central bank failed to deliver the much hoped for stimulus. The yen strengthened, the equity market underperformed and bond yields rose. To some extent the reaction is understandable. The BoJ had to address the operational limits of the current asset purchasing program. The central bank holds nearly 40% of the outstanding public debt. It therefore decided to put less emphasis on the quantitative easing (QE) target of 80trn JPY per year. This was understood as signal of tapering QE.

With 10-year Japanese government bonds trading below zero ahead of the meeting, the new policy, which concentrates on managing the long-term yield level around 0%, has been under-stood as a tightening. The combination of targeting a 0% level of bond yields and being ready to let inflation overshoot are a reckless invitation to the government for more fiscal stimulus. At the same time, increased coordination of monetary and fiscal policy remains on the table. The policy shift by the BoJ has the potential to become very reflationary. This potential will only be realised if the Abe administration accepts the invitation for more fiscal stimulus. Stimulus can now be financed by issuing unlimited amounts of debt at 0% interest. Higher minimum wage, increases of public sector wages or forcing companies to lift salaries by taxing retained earnings are areas where action could materialise soon. Higher wages would increase inflation and weaken the yen’s purchasing power. Falling real rates in Japan would be another factor to drive the yen lower.

 

David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer

 

 

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FIXED INCOME

 

Bank of England: First corporate bond purchases

 

Today, the corporate bond purchase programme of the Bank of England (BoE) starts. Over the course of the next 18 months, the BoE will buy as much as GBP 10 billion of corporate bonds. The bank has published a list of eligible bonds earlier this month; 60% of the issuers are domiciled in the UK, while 10% are from the US, France and the Netherlands respectively. Compared to the purchase programme of the European Central Bank, the programme is much more transparent with the eligible universe, the process and the dates of the purchases all announced in advance.

Given the decline of the GBP bond yields following the Brexit vote, we do not anticipate much downside for yields.

 

Markus Allenspach, Head Fixed Income Research, Julius Baer

 

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COMMODITIES

 

Oil: All eyes on Algiers

 

• The oil market’s focus lies on the producer meeting in Algiers this week. The chances for a credible agreement are low.

• We see oil prices range-bound around USD 45 per barrel as the market’s supply glut is set to last well into 2017.

 

All eyes are on the International Energy Forum in Algiers along-side which Middle Eastern oil producers and Russia are discussing potential supply side measures. In the run-up to the conference, the petro-nations carefully maintained the ‘oil talk’ and prices moved up or down with any statement. Oil tumbled by 4% on Friday on scepticism about a tangible outcome. The chances of a credible agreement are low. The record-high production levels show that petro-nations are in need of cash flows to plug budget deficits. The common denominator for negotiations is small and any deal would enter rough waters shortly after signature. Historically, sacrificing oil revenues has been too bitter a pill to swallow for most petro-nations. That said, Iran’s production and exports have largely caught up to pre-sanction levels, meaning that at least one element of discord has been grinded.

The producers should be careful what they wish for. The US shale industry would cheer on any supply agreement, swiftly responding to higher prices by raising activity and output, enjoying the windfalls and ultimately taming prices. Drilling activity continues to recover across the leading US shale basins with oil prices trading below USD 50 per barrel. This reveals how competitive parts of the shale industry have become and illustrates how the shale boom has structurally altered the oil market. The big picture framed by a pressing inventory overhang remains in place. Growing Middle Eastern exports and a reviving US shale industry suggest that the oil market’s much touted rebalancing will be anything but swift. Supply concerns should prevail in the near term as North American refiners slow crude purchases with the end of the summer driving season and Saudi exports seasonally strengthen in autumn with summer power plant crude burn faltering. We believe the supply glut will last well into 2017 supporting a view of range-bound prices around USD 45 per barrel.

 

Norbert Rücker, Head Commodities Research, Julius Baer

 

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Commodities: Agriculture fails to follow oil’s lead

 

Despite a softer dollar yesterday, wheat, corn and soybeans fell back towards their season lows as bumper northern hemisphere harvests picked up pace. In the United States, harvests are behind schedule due to wet weather that is driving some concern for disease development. Nonetheless, a drier weather outlook should aid progress. As storage bins overflow and farmer sell excess grain, it is not unusual for prices to hit their seasonal lows at this time of year. The fact that big crops are adding to already large stocks is only increasing that selling pressure. Whilst wheat and corn remain a little oversold, a lack of bullish news in the short term is unlikely to provide much upside for prices over the coming weeks. Elsewhere, oil prices surged more than 3% as the focus remains on the oil producers meeting in Algiers. We see low chances for a tangible outcome

 

Agriculture failed to follow oil’s lead yesterday as prices fell back towards their season lows on a pick-up in harvest progress. Oil surged more than 3% as hopes of producers curtailing supply eased.

 

Warren Kreyzig, Commodities Research Analyst, Julius Baer

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