Japan PM resigns over health concerns, equities unaffected – Market Analysis

Japan PM resigns over health concerns, equities unaffected – Market Analysis

Higher inflation & lower unemployment – new FED policy

One of the main consequences of the Federal Reserve's declaration yesterday, which established the reduction of the unemployment rate as the first objective and allowed a more flexible inflation rate, has been the steepening of the interest rate curve.

Long US bonds experienced sharp falls, and with them, the yields rebounded to levels not seen since June.

Tnote10 has reached a yield of 0.78% and is close to exceeding the 0.80% zone, which, if exceeded, would lead to a rise to at least 0.90%.

This type of movement, downward in price, upward in long bond yields, is characteristic in an environment with expectations of rising inflation.

Also, a steep interest rate curve is typical of an economy with expectations of future growth.

Although, on the other hand, the continuation of the Fed's expansionary monetary policy with its program of buying bonds in almost unlimited quantities will considerably limit the capacity for a more pronounced steepening of the yield curve.

This scenario can be considered neutral for the stock markets, and for the moment, this is how the main stock indexes are reacting, without much enthusiasm.

While the steep curve may anticipate growth, fear of uncontrolled inflation with very low benchmark interest rates would slow the markets' bullish momentum.

Most market analysts agree that the market is overvalued or that the recovery movement has been too sudden, and that the anticipation of an economic recovery is not yet guaranteed.

Hence, corrective action is probable, and it would be desirable to eliminate vulnerabilities and thus avoid more abrupt or disorderly downward movements.

But the enormous liquidity that floods the system due to the policies of the central banks makes it difficult for the moment for the corrections to have greater depth.

Shinzō Abe is no more

The resignation of Japanese Prime Minister Abe, announced today, has caused the Japanese index JAPAN225 to fall by almost 2%.

In the first moments, it threatened to drag the rest of the world stock markets. Still, after an initial decline, the North American indices have returned to positive territory, this is one more sign of the market's resilience to downward corrections due to excess liquidity.

USD/JPY has fallen firmly with the news almost 200 pips, and this has caused, by correlation, generalized declines of the US Dollar that has brought EUR/USD back to the 1.1900 zone.

The most extended opinion of the market is that this movement should not have continuity and tend to return to the initial positions.

The resignation of the Japanese prime minister does not have direct consequences or in the Japanese central bank's policy, nor does it imply a change of government that will continue to remain in the current line.

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