Japan Fuels Stocks, Soothing Post-QE Concerns

Japan Fuels Stocks Soothing Post-QE Concerns

The good performance today has also contributed to a monthly budget that despite the turmoil earlier this month, which is positive for the three major indexes. The Dow Jones gained 1.03% to 17372.9 points, the Nasdaq rose 1.38% to 4629.07 points and the S&P 500 and grew 1.08% to 2016.26 points. For the surprise of many, S&P 500 scored a record closing month since June 2013.

Milan Stock Exchange closing was bullish, too, pushing like other European markets from monetary stimulus measures taken by the Bank of Japan. The FTSE MIB index ended the trading day with an increase of 3.07%, to 19 783 points. They drive increases in UBI Banca (+ 6.75%) and Finmeccanica (+ 5.97%).

The news of the day for the financial markets, therefore, comes from Japan. In a surprise move, the Bank of Japan has given a new boost to its ultra-expansive policy having already announced a series of measures to increase the monetary base of 80 trillion yen per year (about 715 billion US dollars). To make matters worse, the government pension fund (a behemoth with assets under management of more than one million dollars) has announced plans to increase its exposure to domestic and foreign equities (both will be worth about 25% of the portfolio) and foreign debt (since ’11 to 15%). All this at the expense of domestic bonds will spend 60-35% of the portfolio of big bottom.

These two unexpected news had a very positive impact on the markets, obviously Tokyo Stock Exchange (which closed higher by 4.83%) had a vast impact to European markets, it spurred risk appetite. All the main lists of the Old Continent have closed the session on sharp rise (in this case the final balance of the stock market indices).

On the fixed income rates on government bonds to 10 years have experienced declines incurred while the yield spread between Italian and German bonds (here the graph of the day spread Bund-BTP) has fallen by 10 points. In the foreign exchange market, the euro fell below $1.25 for the first time since the end of August 2012. This movement is dictated primarily by the strengthening of the dollar in exchange for the yen (Japanese currency has updated a new low for 7 years on the greenback).

At Milan Stock the banking sector after the losses of the past few days returned purchases. Increases are particularly popular with the BPM and UBI Bank. The only exception: the MPS Bank has lost another 10% after the leaders of Intesa Sanpaolo and Unicredit said they are not interested in taking over the Siena bank overwhelmed after the failure of the ECB stress test. In the spotlight there is also “sick” Carige this morning after Standard & Poor’s has put its rating on review for possible downgrade.

Among the big names there are also signs Eni following the quarter that gave positive results despite the unfavorable market conditions. This morning came the promotion SocGen analyst who raised the price target from €8 to 18.5 with “buy” advice. He has filed its estimates on price instead Barclays has set its target to €21.

In light of the surprising move of the central Japanese bank, expectations about the next moves of the ECB, which next week will hold its usual monthly board meeting, are held back. In this sense, the focus of investors is for the publication of the survey on consumer prices in October. In the survey of Eurostat, however, there were no big surprises: the annual inflation rate in the euro area – according to analysts’ expectations – began to rise again and in October is expected at 0.4% compared to 0.3% in September.

The decision to increase monetary stimulus by the Bank or Japan comes a few days after the end of quantitative easing (bond purchases in the markets) by the US Federal Reserve. The end of easy liquidity by the Federal Reserve, although gradual and widely announced, was experienced with some anxiety in the financial markets – a situation reflected by the marked increase in volatility in the middle weeks of October. For markets, dealing with this key passage, the Bank of Japan’s move comes as an element of reassurance that the cash in circulation will remain high and that the end of the monthly purchases of securities by the Fed will be somewhat compensated by Japanese intervention.

If there is a liquidity problem connected to the end of Quantitative Easing within the Fed itself is quite questionable. The experts at RBS in a recent study calculated that, even without the purchase of securities by the Fed, the sum of the balance sheets of major central banks in the world (Fed, ECB, Bank of England, Bank of Japan and the People’s Bank of China) has grown in a sustained manner over the years and this trend will continue in 2015 when it should break at 16 trillion dollars.

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