News this week suggesting Japan’s $1.26 trillion public pension fund could shift more money into stocks and risky assets overseas should bolster the Nikkei stock index and underpin yen weakness, analysts say.
Advisors to the Government Pension Investment Fund (GPIF), the world’s biggest pension fund, said on Thursday the fund does not need to stick to the safety of Japanese government bonds (JGBs).
Analysts say this is a clear sign that the GPIF, which has the potential to have a significant market impact because of its size, could move more funds out of bonds. They add the main implications are that first, more GPIF funds move into equities and then into higher-yielding assets overseas, keeping the yen weak.
“There have been some rumblings about changes to the GPIF for a while but these comments are the most tangible,” said Sean Callow, senior currency strategist at Westpac Bank in Sydney.
“It would make sense that they [the GPIF] would look to take on more risk in an environment that the bank of Japan (BOJ) is committed to buying JGBs, driving out other buyers. The first move is likely to be into higher-yielding domestic assets such as equities as there is no currency risk,” he added.
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India’s NSE index rose as much as 1.2 percent to a record high, and the benchmark BSE index hit its record for a second consecutive session, as foreign investors bet big in a country that just months ago was gripped by market turmoil.
The broader NSE’s all-time high of 6,477.55 points, surpassed its previous high of 6,415.25 hit on Dec. 9, although the benchmark BSE got there first, hitting a record high on Thursday and again on Friday.
Foreign investors are driving the rally, sparking strong gains in the rupee as well.
On Thursday foreign investors posted their biggest daily purchases since Dec. 19, amounting to a net 12.73 billion rupees ($208 million), and marking a 15th consecutive buying session.
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Federal Reserve Bank of St Louis President James Bullard had the biggest impact on bond markets of all Fed policymakers in 2013, according to a new tally.
Research by Macroeconomic Advisers showed Bullard, seen as a policy centrist, beat former Fed Chairman Ben Bernanke for the mantle of most market-moving U.S. central banker, although the Fed chief had a bigger impact on a per-speech basis.
Bullard, a voter on monetary policy last year, moved the 10-year Treasury yield by a cumulative 29 basis points over the year, which was marked by uncertainty about when the Fed would start to unwind support for the economy.
Bullard rebuked colleagues for their decision in June to announce a plan to reduce bond buying, saying inflation remained too low to justify slowing purchases. He dissented from the majority for the first time at that meeting. The Fed eventually announced in December it would start to taper.
Bernanke, who left the Fed this year, racked up a cumulative impact of 21 basis points. New Fed Chair Janet Yellen ranked well down the table at 11 basis points, although she came in third after Bernanke and Fed Governor Jeremy Stein in terms of impact per speech.
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Gold prices are solidly higher in early U.S. trading Wednesday, on some more safe-haven demand and on fresh technical buying. A weaker-than-expected monthly ADP jobs report also gave a boost to gold prices. The still-wobbly U.S. stock market continues to make for a nervous market place at present, which is a bullish underlying factor for gold. April gold was last up $8.80 at $1,260.00 an ounce. Spot gold was last quoted up $5.70 at $1260.50. March Comex silver last traded up $0.283 at $19.71 an ounce.
The ADP national employment report was released Wednesday morning and showed a rise of 175,000 jobs in January. The consensus forecast was for a rise of 189,000 jobs in the ADP report. Gold extended its price gains in the aftermath of the slightly weaker-than-expected ADP report.
While traders and investors are still concerned about the situation regarding some emerging market currencies being in turmoil, most of those troubled smaller currencies have stabilized this week. This helped the Japanese stock market make a recovery Wednesday. The Chinese Lunar New Year holiday has China on holiday this week. That is keeping other Asian markets somewhat subdued. U.S. stock indexes are slightly lower in early electronic trading Wednesday.
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U.S. hiring likely snapped back from a three-year low in January and kept the unemployment rate steady at 6.7 percent, which could ease investors’ fears the economy is slowing sharply.
Nonfarm payrolls are expected to have increased by 185,000 last month, according to Reuters’ poll of economists, after unseasonably cold weather in December limited gains to 74,000.
“The anticipated acceleration in job growth reflects in part the unwinding of the weather-induced weakness last month, and is consistent with other indicators which are pointing to continued positive momentum in the economy,” said Millan Mulraine, deputy chief economist at TD Securities in New York.
The U.S. Labor Department will release its closely watched employment report on Friday at 8:30 a.m. (1330 GMT).
A report on Monday showing a surprise drop in factory activity to an eight-month low in January rattled investors and stoked fears of a significant cooling off in growth after the economy’s robust performance in the second half of 2013.
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Japan’s central bank is planning scenarios for an expansion of its already massive economic stimulus program, looking to go beyond its $70 billion-a-month bond-buying operation, according to officials briefed on the process.
Options include major purchases of stock market linked funds or other assets riskier than Japanese government bonds (JGBs), the insiders said.
More radical ideas are also being floated within the central bank and among government officials who deal with the BOJ, including even more aggressive buying up of JGBs – a market already dominated by the central bank under its existing policy.
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Once again China’s stock market is moving in the opposite direction to its Asian peers.
The benchmark Shanghai Composite stock index rose more than 3 percent in the past month, making it the best performing major stock market in the region. In contrast, the broader MSCI index of pan-Asia Pacific stocks fell about 1.4 percent.
This inverse relationship was also observed in the first half of the year, when Chinese stocks fell around 14 percent amid worries about slowing economic growth in China, while broader Asian stocks rallied roughly 1.25 percent.
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Fears that growth in China is weakening and falling Asian stocks conspired with the on-going European debt crisis to give investors greater concern for the safety of US debt. As a result, two-year Treasury yields fell to a record low today while 10-year yields fell below 3 percent.
“If you look at the Chinese stock market, it looks particularly ugly, and China has a tendency to lead in the ‘rest-of-the-world’ category,” said a trader in London.
In Europe the FTSEurofirst index of top European shares lost around 1.9 percent, with euro zone bank funding worries ahead of the repayment of 442 billion of European Central Bank emergency loans adding to concerns.
“A lot of (negative sentiment) is still emanating from concerns over Europe and the European banking system and the impact that might have if it rolls out globally,” said David Page, economist at Investec.
Gains in overseas markets are lifting US stock market futures as markets prepare for another week of trading. In the opening moments of trading, the Dow Jones industrial average is up 33.03, or 0.3 percent, at 10,651.22. The Standard & Poor’s 500 index is up 4.67, or 0.4 percent, at 1,149.65, while the Nasdaq composite index is up 8.56, or 0.4 percent, at 2,325.73.
It looks like the flight to safety trade is in full effect today, with the Japanese Yen crosses and US Dollar leading the way, especially against the commodity currencies (AUD, CAD, and NZD). The US equity markets are down today but hopes are that the “September Effect” is not upon the equities markets. The September Effect says that historically this month has been the worst month for US stocks.
Because of the correlations between the equities and currency markets, this could mean gains for the Japanese Yen and US Dollar. It looks like AUD/USD was not able to close above resistance at .845 and we could be in for a double-top reversal at that level.
So keep your eyes on the US stock market, because if the September Effect does take hold, then it could be a wild ride for the commodity currencies.