Key Stories from the past week: Central Bank Bonanza

In a week dominated with Central Bank meetings, there was also a bucket load of big-ticket earnings. Mixed results from Microsoft, Meta, Apple, Intel and Amazon spurred on volatility (VIX nearing year highs). Nvidia had 10% swings mid-week enticing client activity (net buying) which fed through to other semiconductor names. The volatile results, weak US economic data, and sell-off in Japanese equities turned the market red on Friday, reigniting correction fears. The sea of red is a timely reminder for investors to manage portfolio risk. See this note on How to Position for Turbulence. However, because of the broader implications, the trading desk can’t deny each of the three Central Bank meetings as this week’s key stories.

BoJ hike helps unwind carry trade and hammers Japanese equities

In a statement on Wednesday the Bank of Japan (BoJ) raised its policy rate to around 0.25% from previously 0%-0.1% in a move slightly higher than the 10bps hike widely expected. The Yen strengthened against the dollar, with USDJPY - which was trading above 155 just the day before -declining throughout the day and broke below the 150-level. Japanese equities have been on decline since the hike, with Nikkei 225 down roughly 8% since July 31st as index heavyweights are negatively impacted by Yen strength. The BoJ also announced it would be cutting its monthly pace of bond-buying to just shy of $20bn, a pace roughly half of recent purchases. Clients in Saxo have been very active on the USDJPY pair, with roughly double the number of trades and 2.5x more traded value. Furthermore, client positions are mostly short (56% short) with more long exposure added in recent days. 

BoJ's Hawkish Moves Could Roil Global Markets

FOMC hold for now - September cut likely

The Federal Reserve decided to hold rates at 5.25%-5.5%, but for the first time the Fed acknowledged 'risks to both sides' of its dual mandate (i.e. risks to both inflation and employment and not just inflation). Inflation made 'some' further progress in recent months, while job gains 'have moderated' – therefore an interest cut may come as soon as September. The market moved to price in 3 cuts of 25bps this year and 10y treasury yields dipped below 4%. Saxo Bank clients were very actively trading and net buyers in USDJPY that fell from around 155.10 below 150.00 during the week.

FOMC Market Reaction

BoE first rate cut since 2020

The BoE was the third central bank to meet this week and a 5 – 4 vote split resulted in a 25bps cut to 5%. Sterling saw a strong run in July due to relative economic and political stability and the expectation to trail other major economies in cutting rates in the medium term. The cut was a 50:50 call but sterling and Gilt yields faltered as a result. The action naturally encouraged GBP flow with Thursday showing peak GBP activity across Saxo’s client base, albeit overshadowed by Yen and Dollar pairs.

BoE Cut Wont Damage Pound's Resilience

With most of the big tech earnings in the rear view and over halfway through this reporting season, the upcoming week will be a little quieter in comparison. On earnings, those to look out for include SMC & Amgen on Tuesday, Disney & Novo Nordisk on Wednesday, Eli Lilly & Alibaba on Thursday. After this week’s rate policy decisions and mixed economic data, US job-data (Jobless- / Continuing claims) will be of interest to follow, as we navigate towards the final weeks of an otherwise disappointing earnings season for big tech and AI prospects.