Wakeup Call: Bank Of Japan Boosts Risk Sentiment

With BOJ initiating another round of QE and Bernanke indicating that QE2 could come around risk sentiment is boosted once again. However it is not going to last long.

What's going on?

Bernanke's Jackson Hole speech aided risk sentiment and now the Bank of Japan has (unsurprisingly) made a move to weaken the Yen. The bank-loan programme has been increased to the tune of JPY 10 trillion to take total available funds to 30 trillion. While risky assets are sure to embrace the action, the expansion will do little in terms of actual easing. Conditions have been decidedly easy in many years, but have not helped Japan at all.

The earnings season is over, but the calendar is filled to the brim with US spending and income data and the Eurozone business climate indicator. The latter is a fairly solid leading indicator of GDP and it points to accelerating YoY growth in the Eurozone.

Spending and income are expected to have increased in July as vehicle sales grew soundly.

Key Themes

While Wall Street got all excited about Bernanke's speech, Intel cut its revenues guidance by 5% for the quarter. Is Intel's lower guidance just the first of many? THIS was the really important news out last Friday.

As we have been saying for a while now negative earnings revisions will pick up now and continue for a while and we do expect this to lead equities lower. Friday, Intel lowered their sales forecast for 3Q by 5% and we expect other companies with global exposure to follow suit.

Calendar

Market Musings

Personal income and spending from the US are expected to pick up slightly in July from the flat numbers in June. The latter is expected to be driven by vehicle sales. We already know that retail sales increased 0.4% MoM in July with vehicle sales up 4.3% MoM.

While the AUD joined the rebound in risk over the weekend, data out this morning were not too kind on the currency. HIA new home sales declined 7% MoM in July following a 5.1% drop in June. Inventories also came in below expectations though operating profits in Australia were far above expectations at 18.9% QoQ vs. 5.8% exp. and 3.9% in 1Q. The downward correction to inventories is negative for GDP, which is out on Wednesday.

US 2Q GDP growth was revised down as expected though only to 1.6% QoQ annualized (Saxo: 1.2%, consensus: 1.4%) as an upward revision to consumption (2.0% vs. 1.6% in the original BEA estimate) somewhat counteracted negative contributions from inventories and the trade balance. Michigan confidence was lower than expected at 68.9 (69.9 expected).
Heading over to FX Options EURUSD vols has come small offered again and the market seems to be without a clear direction. We expect EURUSD to keep tight range the next couple of day with the market waiting for numbers later this week. EURCHF continues to be well bid for EUR puts/CHF calls and it's difficult to see how the ccy could avoid a further drop with RRs trading at current levels

Equities

Equities continue to follow the overall risk sentiment and we do not expect this to deviate in the very near term future. However, as with other data developments it is important to keep a close look at the smaller things that could develop into bigger issues. Intel's downward revisions of sales expectations last Friday is exactly such a thing. It is our expectation that we are going to see a slide in earnings expectations for 2011 especially led by companies with global exposure and this will eventually lead equity prices lower. However due to the uncertainty in forecasting within the current economic framework companies will be very cautious, but the trend is clear.

In today's trading we expect the European session to open 0.6% higher and we do expect this to continue higher in the early part of the trading session. However this is not a risk rally setting off a new bull trend; it is a bear market rally and within the next couple of days we do expect the trend to turn downwards again.