Woolworths and commodities temper BOJ enthusiasm

Friday’s BOJ announcement was unexpected and has caused investors to reconsider strategy.

The most obvious impact of the announcement was on currency. Friday’s sharp losses in the Yen have continued in Asian trade this morning. Whether intended or not, the BOJ statement was timed for maximum effect on currency markets. Its impact was magnified because it came just after the Fed had moved in the opposite direction, ending its QE program and becoming more positive in its language regarding progress in the labour market.

It remains to be seen how much impact the BOJ initiatives will have on underlying inflation and economic growth unless they are not accompanied by more government micro economic and structural reform. However, it’s likely that it will have further impact on international asset prices, including stocks, as Japanese savings are pushed into alternative investments.

Stocks were pushed higher on Friday. However, ongoing reaction in the local market this morning has been tempered by softer commodity prices and disappointment in Woolworth’s sales result. While investors have become accustomed to tough going with Big W and Masters, the impact of price completion on Australian Food and Liquor has disappointed the market this morning.

High yielding stocks like the major Australian banks are likely to benefit from the Bank of Japan initiative. Westpac’s result this morning looks good enough to maintain recent investor support for the banking sector. While the result relied to some extent on falling bad debts to offset weaker trading income in a low volatility environment, investors are likely to be happy enough with ongoing expense control and the bank’s strong and improving capital position.

One consequence of the BOJ initiative was to push the Dow Jones Index back above its mid-September high, a prospect that seemed highly unlikely only two weeks ago. Since that time, however, markets have had the benefit of a stronger than expected US earnings season to provide further support for stock valuations.

By contrast, the ASX 200 index is still well below its August high reflecting commodity weakness. The next key test for the index may be the 78.6% Fibonacci retracement level around 5561.

Gold was a casualty of the BOJ announcement which led to a stronger $US. This is bad news for the precious metal and comes at a time when inflation remains low. This saw gold break below its $1180 support level which would rank among the most famous and closely watch technical level in world markets at the moment.

For further comment from Ric Spooner please call 02 8221 2137.