Global Markets and Currency Trends Briefing: 9/27/16
Last week was full of big announcements from banks. Almost any investor who follows long-term trends has caught wind of them.
The Fed made an important (albeit anticlimactic) decision on September interest rates... The Bank of Japan rolled out unusual measures to fight deflation... and the sixth-largest private bank in the world saw its stock plunge to a 30-year low.
But let’s start with the latest non-proclamation from Janet Yellen.
No Fed Rate Hike... Yet
After Yellen’s hawkish remarks in Jackson Hole, some investors were betting on a policy rate increase this month. But when the Federal Open Market Committee (FOMC) emerged from its meeting last Wednesday, those investors were quickly disappointed.
Citing a lack of evidence of strong inflation, the FOMC decided to keep rates unchanged this month. Stocks pushed higher on Wednesday as a result, but they leveled out shortly after.
The pullback may owe to the FOMC’s suggestion that a rate hike is likely before the end of 2016. Three hawks dissented from Yellen’s decision to keep rates unchanged. This was clearly one of the most divisive Fed meetings in recent memory.
(For more on who among the FOMC is for and who’s against a hike, check out this article.)
Bank of Japan Sets Ten-Year Bond Targets
The Japanese central bank has a tough job. The country hasn’t seen steady inflation in nearly 20 years. And to date, most of their policy changes have utterly failed to right the ship.
Last week, Governor Haruhiko Kuroda introduced an unconventional new tool to the BoJ’s arsenal. The bank will now maintain a target rate of zero on their 10-year government bonds. Usually, central banks only set target rates on short-term debt. Long-term debt is conventionally left up to the whims of the market.
But this summer has seen several rounds of harmful appreciation for the Yen. First it gained against the pound after Brexit. Then two Korean Won devaluations sent it even higher. Gov. Kuroda feels that an expansion of the Bank of Japan’s easing policies is the only way out of this deflationary spiral.
While the move was unconventional, it was lauded by some banking policy figures, including former Fed chair Ben Bernanke. The policy – if it works – should provide a boon to struggling Japanese exporter stocks. The iShares MSCI Japan ETF (NYSE: EWJ) jumped up after the announcement.
Deutsche Bank in Hot Water
The sixth-largest bank in the world has had one of the worst years of any bank since 2008.
First, Deutsche Bank (NYSE: DB) shares tumbled by almost 40% this summer after the Brexit shocked European markets. Then, a couple weeks ago, the U.S. Department of Justice announced that it was suing the bank for $14 billion.
The lawsuit is over Deutsche Bank’s role in selling subprime mortgage-backed securities in the lead-up to the 2008 financial crisis. Similar lawsuits have cost other major banks billions. But the DoJ’s $14 billion figure is much higher than any settlement that it has reached so far.
Deutsche executives promptly responded that they would not pay $14 billion, but shareholders weren’t convinced. The day after the DoJ announcement, the bank’s stock plunged 8% to a three-decade low.
Adding to Deutsche Bank’s worries is the expansion of the credit default swap market on its senior debt. As we learned back in 2008, swaps are insurance contracts which pay out in case of a default on their underlying bonds. Rising swap price is a sign of shrinking confidence in a bank’s solvency.
If you’re hungry for more information on the latest trends driving the markets, make sure to check out articles marked “Market Trends” in our archives.
Thoughts on this article? Any big stories we missed? Leave a comment below.