EUR 155.78 For Business Accounts Only

022018 CGI Weekly Global Equities Strategy Update

Geo-political and macro commentary 

In Asia, as expected, the Japanese government reappointed BOJ Governor Haruhiko Kuroda for another 5 years, after the current term ends in April, The background of the two deputy governors, who will assume their posts in March, also won't change much. One of the openings will be filled by a career central banker, Masayoshi Amamiya, and the other by an academic, Masazumi Wakatabe. The 52-year-old Wakatabe is known as a strong advocate of reflationary policies, focusing on BOJ purchases of stocks and government bonds. But given the rising costs and the practical limits of ramping up those purchases, he likely won't push for more stimuli once he joins the BOJ. Wakatabe could, however, oppose attempts to dial back stimulus even if the economy keeps strengthening, complicating the BOJ's efforts to prepare markets for an eventual exit from its ultra-loose monetary policy.

Kuroda's biggest 2nd term-challenge will be to lay the grounds for an eventual exit from his radical monetary experiment. We see the BOJ continue its ultra-easy policy partly to prevent the recent market rout and a strengthening Yen from hurting an export-reliant recovery. The JPY has posted losses in today’s session. In North American trade, USD/JPY was trading at 107.31, up 0.55% on the day. The JPY looked sharp last week, as the currency gained 2.5% against the retreating USD. However, the greenback has bounced back on Tuesday, pushing the JPY above the 107 line.

On the release front, there are no US events on the schedule. Later in the day, Japan will release Manufacturing PMI and All Industries Activity. On Wednesday, the Federal Reserve will release the minutes of its January meeting. BOJ officials say they have internal calculations for an exit strategy. Unlike its US and European peers, however, the BOJ has not made public disclosures about an exit plan. Kuroda has said it's premature to discuss inflation more as it is so below the BOJ’s target. So, we see him talk down the Yen at levels around 107 against the USD.

In Europe, Eurozone government bond yields rose today across the board on market speculation over the next ECB chief at a time when monetary policy is the main threat for bond markets. Eurozone finance ministers yesterday chose Spanish Economy Minister Luis de Guindos to succeed ECB Vice President Vitor Constancio in May, a move seen boosting the chances of someone from one of the "core" Eurozone countries becoming head of the ECB next year. This in turn is seen as increasing the likelihood that the central bank takes a more "hawkish" stance in the future, erring on the side of tighter policy, which is negative for European government bonds. We see as the likely successor for Mr. Draghi Bundesbank President Jens Weidmann, who has consistently argued against the ECB's EUR 2.55 Trn bond-buying scheme that pushed yields to record lows in recent years. This would be mildly bearish for Bunds and Eurozone bonds.

If US President Trump's administration decides to impose tariffs on European steel imports, the EU will respond in a resolute way, German economy ministry said today. "We must first wait and see whether and what action the US President will take," an economy ministry spokeswoman said. "If US restrictions on European steel companies actually were to materialize, the EU would respond appropriately. Again, President W. Bush had implemented 10% tax in 1989 on foreign steel, and that was the nail in the coffin for the US steel industry.

In the Americas, investors will focus on the forthcoming March FOMC meeting (March 20 -21) when markets expect another +25 bps increase, dealers will be looking for signs that the majority of the committee is aligned for the increase. They also will be looking to see how the FOMC’s views on inflation have evolved. Fed policy makers speaking this week include NY Fed President Dudley and Atlanta Fed President Bostic and Cleveland Fed President Mester is among speakers at the U.S Monetary Policy Forum in NY. With little to no economic US data on tap, the markets focus now turns to the US Treasury department, which opens its auction floodgates beginning with today’s record supply of +$151B of three- and six- month bills (Total new debt supply is +$258B this week). The US debt sales should provide a better market understanding of how steep yields can back up in the short-term.