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BoJ & Yen trade
Despite the Bank of Japan (BoJ) taking a hawkish stance, USD/JPY moved higher, contrary to consensus expectations. Here are the JP Morgan analystsattempting to rationalize the subsequent market reaction through fundamentals, using ex-ante facts for one side of the argument and ex-post for the other. They might need some help with logical reasoning.
It could simply be due to the fact that short USD/JPY was a heavily crowded position entering Q1 2024, thus setting a high bar to perform well. What began as a bet on macroeconomics and monetary policy has now morphed into a forex intervention trade.
One of the key weaknesses we've noted in the Japan rates and FX investment thesis is its heavy reliance on divestments and repatriation out of non-JPY assets by locals, without supporting evidence. i.e., There are strong assumptions about what Ms. Watanabe plans to do without bothering to consult her.
We continue to hold the view that the BoJ hands a big gift to the macro trading community roughly once a decade, which is then given back in bits and pieces in subsequent years. Most of the investment thesis related to Japan's economy we encounter are an amalgamation of press reports in English, much less than an auto-transcribed summary of articles from local media sources.
Merlyn Advisors takes an activist stake in Telecom Italia
Merlyn Advisors, a London-based fund, has announced that it has taken a 0.53% stake in Telecom Italia (TIT IM). Telecom Italia shares have underperformed the broader market lately, with a current market capitalization of just €4.6 billion.
According to Reuters, Merlyn is taking an activist stance against Telecom Italia CEO Pietro Labriola and its board. Italy's largest telecom provider is in discussions to sell its landline grid to the private equity group KKR.
Corporate activist stories of this nature are less common in Europe than in the US. This is the second time in the past week Merlyn Advisors has appeared in our news feed. It should be an interesting story to follow since Telecom Italia is a benchmark corporate credit issuer.
FOMC focus preview
This is just a summary of where market commentators are focusing their attentions and a recap of our past updates. Otherwise, we have no special insights to share.
Today's FOMC focus is on hints of Fed guidance on future interest rate cuts. Short-term USD interest rates have repriced substantially higher over the past couple of months to align closely with official Fed forecasts published at the December 2023 meeting. Except for last week's PPI, there is probably insufficient justification for official (PCE) inflation and interest rate forecasts to be revised higher.
Much depends on whether one deems monetary policy was too tight or about right towards the end of 2023. A couple of Fed forecasts will undoubtedly push their interest rate forecasts up and out in light of the recent economic data and robust growth. Others are likely to do the opposite, having become more confident that the likelihood of high single-digit inflation outcomes has diminished.
The up and down revisions in FOMC forecasts towards the latter part of last year were quite dramatic. We would be very surprised by similar changes at this meeting.
So far, we're not having much luck with our Treasuries higher, stocks lower call into quarter-end. Similarly, we anticipated a ceasefire between Hamas and Israel by early last week, which has not come about. With respect to the latter, having failed to come to a mutual understanding within the timeframe set, now both sides are under coercive pressure. Sadly, both parties are likely to get more or less what was on the table a month earlier, while unnecessary deaths could have been avoided.
