Daily Agenda: Bank of Japan Pauses but Says It’s Ready to Act

Yen appreciates against the dollar; five U.S. states vote in primaries today; China explores taxing currency trades.


As had been widely anticipated, Bank of Japan Governor Haruhiko Kuroda and his fellow board members today concluded its monthly meeting by announcing no shift in interest-rate policy or in the quantitative easing facility. While the central bank opted to keep the benchmark overnight rate at –0.1 percent, the language in the announcement was dovish, stating that policymakers are prepared to take further action if warranted. During a press briefing after the announcement, Kuroda said that new action might come before the impact of negative rates can be fully measured. The yen advanced versus the dollar in response to the news, leaving year-to-date appreciation at nearly 6 percent, despite Bank of Japan easing measures. While Kuroda continues to express confidence that negative rates and currency-base expansion will yield the desired results, market structure suggest that many speculators are willing to wager that he faces a long uphill struggle in pursuit of an elusive inflation.

Big day for U.S. presidential race. GOP frontrunner Donald Trump continues to face pushback from supporters of other Republican hopefuls in polling today, as Florida Senator Marco Rubio and Ohio Governor John Kasich make what may turn out to be last stands in their home states, which feature winner-take-all delegate distributions. Without a viable candidate to beat Trump to outright victory — Texas Senator Ted Cruz comes closest — Republican strategists now appear intent on blocking the reality TV star from amassing enough delegates to avoid a contested convention in June. On the Democratic side, former Secretary of State Hillary Clinton needs to secure a clear margin of victory over Senator Bernie Sanders in hotly contested Midwestern states such as Ohio and Illinois to secure her frontrunner status. Clinton has a large lead in Florida. But Democratic primaries are proportional, meaning Sanders will be able to pick up delegates even if he loses major states.

JPMorgan seeks to revive mortgage bond markets. For the first time since the credit crisis, a major U.S. bank is executing a transaction in which it issues tranches of residential mortgage debt entirely owned on a proprietary basis. JPMorgan Chase & Co. announced the issuance, which will transfer credit risk from the bank to investors for a mortgage pool of roughly $2 billion. The move to enter private markets rather than sell the loans to government sponsored agencies Fannie Mae and Freddie Mac potentially open a new chapter in the recovery of structured-mortgage debt markets.

China seeks to impose Tobin tax on speculators. Media reports surfaced today indicating that the People’s Bank of China is close to releasing proposed rules to inhibit currency speculation. Although bank policymakers have discussed such a move publicly recently, the timing of a move to tax speculative foreign-exchange transactions in advance of the yuan’s inclusion in the International Monetary Fund’s reserve currency basket raised eyebrows. Some strategists warn that a tax on currency trading may hurt sentiment, an unintended consequence similar to the negative reactions to Beijing’s equity-market interventions last year.

Goldman buys online adviser. In the latest example of the Wall Street establishment embracing fintech, on Monday the investment management division of Goldman Sachs Group announced the acquisition of year-old startup Honest Dollar. The acquired company, which is headquartered in Austin, offers low-cost defined contribution plans to small employers. Details of the purchase were not released.

Foxconn looks for more financial disclosure on Sharp deal. On Tuesday, media reports surfaced indicating that management at Taiwan’s Foxconn Technology Group have paused an agreed upon takeover of Japanese-based Sharp Corp. as it seeks to get a better handle on the target company’s finances. The $5.3 billion transaction between the electronics giants has been delayed as Foxconn examines contingent liabilities. The analysis may ultimately result in a reduction of the price Foxconn will pay lenders holding preferred shares in Sharp when the transaction closes.

Portfolio Perspective: Bullish Signals from the Consumer Sector — Adam Grimes, Waverly Advisors

We have done considerable work on the spread between discretionary and staples serving as a psychological and behavioral indicator. This makes sense from several perspectives, but perhaps the most obvious is that these disparate consumer sectors represent reasonable extremes of cyclical and defensive positioning; it is difficult to imagine broad defensive stocks rallying without accompanying strength in staples, and the same holds true for cyclicals and discretionary stocks. (One of the challenges to this methodology might be that existing broad indexes may not be the best tools for this delineation, as membership and weighting choices could obscure the underlying flows.)

There is another way to make this analysis even more powerful. We know that percentage-change charts are highly dependent on the starting point: Given virtually any set of markets, we could make the chart say anything we want by carefully choosing the date to represent the zero point for the chart. One way to make these tools more consistent and to bring an element of market structure into the analysis is to tie percentage-change charts to previous, important pivots in the market. In other words, if we are looking at stocks, reference previous key highs and lows as anchor points for percentage change charts.

Strong flows into cyclical (i.e., more speculative) sectors off of the February lows confirms the bullish sentiment. By some measures, this delta between staples and discretionary is higher on the current rally than on similar rallies in the historical record. This is a confirmation of our bullish stance on stocks.

Adam Grimes is chief investment officer for Waverly Advisors in Pittsford, New York.