Failure to launch QT from BOJ sinks the yen, as Farage could be the next UK opposition leader

The Bank of Japan left much to the imagination at its meeting on Friday. No change in interest rates was expected, however, the market expected the BOJ to dial back on their bond purchases, as part of the BOJ’s plans to normalize interest rate policy. In the aftermath of the decision, the yen has fallen, but the Nikkei is higher by 0.5% and the 10-year Japanese government yield has declined and is currently lower by 4 basis points.

The BOJ’s cautiousness when it comes to policy normalization, has been cheered by some. The real estate sector in the Nikkei is leading the market higher and is up by 2.6%, followed by communications services, which is higher by 1.9%. The market had expected the BOJ to announce that it was stepping back its bond buying at this meeting, however, instead it maintained its purchases at 6 trillion yen per month, which is $38bn, however, it did say that it would lay out plans for tapering its bond buying over the next 1-2 years at its next meeting in July.

The question for investors is why did they wait a month and not start tapering today, is there that much difference? The answer is most likely an abundance of caution at the BOJ. The cautious stance is clear when it comes to bond buying, however, the BOJ was also expected to hike interest rates at its meeting in July. We doubt that the BOJ will hike rates and embark on QT in the same month. The Japanese interest futures market has reduced expectations for a July rate hike, with a 35% chance of a rate hike next month. It seems more likely that there will be a hike in September, with 10 basis points currently priced in by then.

The BOJ is normalizing policy at a snail’s pace, and they may have to justify this caution at their press conference later today by saying that the economy is weakening, and the consumer is showing signs of strain. However, considering analysts see Japan’s longer term neutral rate at between 1-2%, the BOJ have a long way to go on normalizing rates.

Yen intervention risk rises

So far, the yen has been sold off on the back of the BOJ rate decision. USD/JPY is down nearly 1% and has broken back above 158.00. This pair is worth watching closely, as it has broken out of the top of its recent range and is at its highest level since April, when the BOJ had to start intervening to strengthen the currency. Thus, today’s move in the yen is significant. If USD/JPY continues to move above 158 and towards 159, then we would expect to see volatility as it enhances the risk of official BOJ intervention.

French elections continue to spook the market

Elsewhere, stock market futures are rising in Europe and the US. European markets have underperformed the US this week, the Cac 40 has been under intense pressure and is currently down more than 4% in the past 5 days, followed by Italy’s FTSE MIB which is down more than 2.5% in the past 5 days. The risk is that there could be more volatility as we lead up to next week’s first round of voting in the French parliamentary election. Marine Le Pen’s party are expected to get the largest amount of votes, but they may fall short of an outright majority. The risk of a win for Marine Le Pen and a shift in parliamentary power in France to the hard right is fueling the selloff in French stocks, and the sell off in French banks in particular. While there might be some respite from the selling at the end of the week, we think this will be temporary, as political uncertainty may continue to weigh on sentiment.

Bond concerns may continue to weigh on sentiment

Bond yields are also in focus. The spread between 10-year French and German bond yields is at its highest level since 2013, and the Italian – German yield spread is also at its highest level in months. This is a symbolic moment for French yields. While we do not think that France will end up like Greece, Spain or Portugal in the height of the Eurozone sovereign debt crisis, the rise in the yield spread with Germany shows that France’s bond market now has more in common with the southern European countries, rather than the Germanic Northern European countries.

The euro has also been hit this week, and it is one of the weakest currencies in the G10 FX space. However, the inaction from the BOJ has made the yen the weakest of the major currencies in the past week. We expect more euro weakness until we get clarity about the outcome of the French election, the final round of voting is on July 7^th, a busy week for European elections!

Wil the prospect of Farage as opposition leader hurt UK market sentiment.

We will also be watching UK asset prices closely after the latest YouGov/ The Times poll found that the Conservatives had slipped behind Reform, with 18% of the vote vs. 19% of the vote for Reform. Labour is still in the lead with 37% of the vote, but even their lead has narrowed. This week has been a big win for the Reform party led by Nigel Farage, and there is a real chance that they could be the next British opposition leader. Will the markets sell off on the back of the gains for the hard right in the UK? We shall have to see.

Elon’s massive pay day

Elsewhere, Tesla’s shareholders voted to uphold Elon Musk’s enormous $46bn payday. The Tesla share price rose more than 2% on Thursday. 73% of the shareholders who voted backed the pay plan, although it has been rejected by a court. The stock had initially surged on Thursday, but it gave back some gains before the market close. However, the stock, which is down more than 25% YTD, is a sign that it’s not only Tesla’s board and shareholders who think that Elon is worth the money, the market does too. Whether or not a CEO is worth $46bn, it highlights how vital he is to the company. If Musk had left Tesla, it would be hard to imagine a future without him. Some may argue that this is a high price to pay for keeping Elon at the helm of the company. Tesla is worth watching today, to see if the vote to affirm Musk’s dominance at Tesla will continue to boost the Tesla share price.