Daily Agenda: Investors Get That Easy Monetary Policy Feeling

Yen falls on negative-rate expectations; Wall Street bonuses face threat; new emissions revelations; Baden-Württemberg’s Karl Haeling on central-bank policy.

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Johan Jeppsson

Activity in currency markets in this morning indicates that many investors anticipate further intervention by the central banks of developed economies. The Japanese yen fell versus the U.S. dollar by nearly a percent before 6 a.m. U.S. Eastern time. Expectations have begun to rise that the Bank of Japan will cut rates further into negative territory for key deposit benchmarks as well as move to negative lending costs. In an interview on Thursday, former Bank of Japan deputy governor Kazumasa Iwata suggested that rates might eventually decline to a negative 1 percent as the central bank tries to lift inflation. Coming on the heels of an announcement by Sweden’s Riksbank that rates there will remain negative and easing extended and the European Central Bank’s program to charge interest on deposits by major banks, the negative-rate experiment appears likely to continue to ripple through all asset classes of global markets.

Wall Street bonus pools face fresh restrictions. Yesterday the National Credit Union Administration was the first federal financial regulator to consider proposed rules designed to fulfill a portion of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act by restricting compensation packages of top Wall Street executives. The draft rules, which the NCUA released, would hold back a large portion of cash bonus payments for up to four years, subject to a clawback if the employee was later deemed to have taken inappropriate risk. The rules would take into consideration both the employee’s role as well as the size of the firm and its importance to financial market stability. Six regulators, including the Federal Reserve and Federal Deposit Insurance Corp., must approve the proposal before it can be released to the industry for public comment.

Fresh emissions investigations rock auto industry. German car maker Daimler announced financial results today with first-quarter 2016 returns that trailed the same period in 2015 by 9 percent, slightly weaker than consensus analyst forecasts. Separately, the Stuttgart-based company revealed a probe into emissions tests by the U.S. Department of Justice, that sent its share price tumbling in early trading. The news comes on the same day Japan’s Mitsubishi Motors Corp. announced that an internal investigation showed that it had manipulated fuel-economy metrics.

Singapore regulators crack down. Today the Monetary Authority of Singapore removed documents and data from multiple securities brokerages in an insider-trading investigation. The move comes as the city-state’s regulators have in recent months stepped up efforts to improve investor confidence in the markets. Separately, Singapore’s Attorney-General charged former BSI private banker Yeo Jiawei as part of an investigation into money laundering, part of a widening probe into Malaysian sovereign wealth fund 1Malaysia Development.

Short-term money-market rates spike in China. Benchmark short-term lending rates in China reached multimonth highs as the week concluded with the seven-day repurchase rate rising by more than 15 basis points after the People’s Bank of China added an additional $680 billion into the system through a reverse repo auction. The liquidity measures come as money markets tighten as corporate taxes come due.

Portfolio Perspective: Policy remains Supportive for Markets, but Expect Bumps AheadKarl Haeling, Landesbank Baden-Württemberg

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The European Central Bank left policy unchanged and Draghi did not do much to increase expectations for further easing measures. This was very much as anticipated but still may have contributed to the weakness across assets, if only for psychological reasons.

Central-bank policies have been very influential for global markets in recent years, and a lot of investors focus on them. We do not want to downplay this too much but we do believe many market commentators overly link asset performance to monetary considerations.

There is no doubt that quantitative easing and super-low to negative interest rates push investors into riskier assets and help drive up their prices. But negative interest rates also reduce savings, hurt the functioning of credit markets and can increase deflationary perceptions. And as time goes on, we believe the benefits of lows rates diminish and negative unintended consequences increase.

So as upcoming central-bank meetings approach, the markets will increasingly look at both sides of the situation when assessing the implications. The next Federal Open Market Committee meeting will occur next Wednesday and the next Bank of Japan policy meeting is set for Thursday. Few observers expect any policy change from the Federal Reserve and will instead focus on whatever few clues are provided for the outcome of June’s FOMC meeting.

There is a better, but less clear chance, of the Bank of Japan trying new policies next week given the strength of the yen. The Bank of Japan could opt for even more negative rates but this could easily backfire again as Japanese loan markets are struggling to adapt to the current yield structure. There has been some talk that the Bank of Japan could increase its quantitative-easing purchases of exchange-traded funds in an attempt to trigger an equity rally and associated capital inflows.

Given the increasingly mixed nature of the influence of monetary policy for investors, look for the markets to rely more on their respective individual supply-and-demand dynamics for direction. Currently most markets have overbought, or nearly overbought, readings in terms of short-term trading sentiment but underweighted positions among longer-term investors, particularly in equities. The longer that central-bank policies remain dovish, they should maintain a supportive foundation for risk markets and bonds. But uneven price patterns and sudden shifts in psychology should also become more common.

Karl Haeling is a vice president at Landesbank Baden-Württemberg in New York.

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