Yen surges on BOJ as equities retreat, treasuries sink declines

BLOOMBERG

Even when they do nothing, central banks have the power to surprise and bewilder.
The yen surged the most since August and the Topix Index lost more than 3 percent as equities worldwide fell after the Bank of Japan refrained from adding to its monetary stimulus. U.S. stock futures remained lower and Treasuries erased gains after data showed the economy expanded in the first quarter at the slowest pace in two years. Gold rallied as the Federal Reserve signaled no hurry to raise interest rates.
A majority of economists surveyed by Bloomberg had predicted some action to counter a strengthening yen that had cast a shadow over the outlook for wage gains and investment spending. The explosion of volatility shows how investors have singled out central banks as the key driver for global financial markets. As the Fed debates when and how fast to raise rates, data showed American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices during the first quarter.
“It’s the central banks that still set the course,” said Jan Von Gerich, chief strategist at Nordea Bank AB in Helsinki. “Even slight deviations from what people are expecting are enough to trigger market moves.”

Currencies
The yen jumped 2.8 percent to 108.30 per dollar at 8:33 p.m. in New York, its biggest increase since August, when China unexpectedly devalued the yuan.
Japan’s central bank left unchanged three key easing tools — the 80 trillion yen target for expanding the monetary base, the 0.1 percent negative rate on a portion of the cash banks park at the BOJ, and a program to buy riskier assets including stocks.
“The BOJ had an opportunity to at least temporarily short-circuit the yen trend but failed to act,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. “It has provided the green light for further yen strength in the near-term.”
New Zealand’s currency surged 1.5 percent, the most since March 29, after central bank Governor Graeme Wheeler defied some market speculation he would cut already record-low rates. Three of 16 economists surveyed by Bloomberg forecast a reduction.
After the Fed refrained from signaling that any monetary tightening was around the corner, the Bloomberg Dollar Spot index slid to the lowest level since June.

Bonds
Bonds advanced, with German 10-year yields falling the most in more than a month, after the Fed left interest rates unchanged on Wednesday. The yield on the Treasury 10-year note slipped, though the notes pared gains.
“It’s hard to get yields higher when central banks are keeping a dovish bias and rates are extremely low,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “The BOJ will have to move sooner or later and the market will start pricing that in again.”
Benchmark Treasury 10-year note yields dropped two basis points to 1.83 percent, after reaching 1.81 percent, the lowest since April 20, based on Bloomberg Bond Trader data. Germany’s 10-year bund yield fell five basis points to 0.24 percent, set for the biggest drop since March 17, while equivalent Japanese bond yields declined three basis points to minus 0.091 percent.
The Fed is weighing when to tighten policy again after raising borrowing costs in December for the first time in almost a decade. Fed Funds futures show a 21 percent chance of a move at the next review in June.
The cost of insuring corporate debt against default rose for the third time in four days. The Markit iTraxx Europe Index of credit-default swaps on investment-grade companies rose one basis point to 72 basis points. A gauge of swaps on junk-rated companies added four basis points to 306 basis points.
Malaysia’s sale of 3 billion ringgit ($770 million) of seven-year notes, priced at an average yield of 3.8 percent, debt drew more bids than a previous offering even as a bond default by a state investment company earlier this week hurt foreign investor sentiment.

Stocks
The MSCI All-Country World Index dropped 0.2 percent. The Stoxx Europe 600 Index lost 1.1 percent, heading for its biggest decline since April 5 as almost all of its industry groups declined.
Futures on the Standard & Poor’s 500 Index slid 0.8 percent after the gauge rose for a second day, closing near its highest level of the year. In the premarket, Facebook Inc. climbed 11 percent after reporting sales and profit that topped projections. Medivation Inc. added 2.3 percent after Sanofi offered to buy it.
While investors are endlessly fretting about visible threats to stock prices, the bull market that began seven years ago just became the second-longest ever. Laszlo Birinyi of Birinyi Associates Inc. still sees more room for gains.
Almost two shares declined for every one that gained in the MSCI Emerging Markets Index, which was little changed after two days of gains. Benchmark gauges in Abu Dhabi, Dubai, India, Taiwan and Malaysia fell at least 0.9 percent. The Shanghai Composite Index lost 0.3 percent.

Commodities
Gold rallied 0.8 percent to $1,256.25 an ounce. It’s up for a fourth day, the longest run in more than two months. Copper continued its longest slump in three weeks as traders debated whether Chinese manufacturing data will validate forecasts for better demand from the largest metals consumer.
West Texas Intermediate crude slipped, though it held above $45 a barrel after jumping 6.3 percent over the previous two sessions. U.S. production fell for a seventh week to the lowest level since October 2014, while Interfax said Russia may take part in the Organization of Petroleum Exporting Countries’ scheduled June meeting.
“The fact we have a supply-side response coming through is one of the positives for the market,” Michael McCarthy, chief strategist at CMC Markets in Sydney, said by phone. “The disaster scenario that was talked about in the first quarter has now been pulled back. It’s become pretty clear that prices are not going to $10 to $20 a barrel in the near future.”