Yen, bond yields rise as Bank of Japan action underwhelms

[July 29, 2016]  By Jamie McGeever

LONDON (Reuters) - The yen jumped on Friday and Japanese government bond yields rose the most in eight years, lifting global sovereign borrowing costs, after the Bank of Japan's latest steps to boost growth and inflation fell short of investor expectations.

Investors also digested a heavy diet of European corporate earnings dominated by some of the region's biggest banks, and awaited the first estimate of second-quarter U.S. growth.

The dollar's fall against the yen, its steepest in a month and fourth steepest this year, pulled it down against other currencies, putting the trade-weighted dollar exchange rate on course for its biggest weekly fall in two months.

Stocks absorbed the BOJ's decision a little more easily, in part because the central bank increased the purchases of exchange-traded funds (ETFs) in its easing package. Japan's Nikkei rose, and European indices rose on the back of better-than-expected results from Barclays and UBS.

"The BOJ offered markets a little appetizer, but thefull menu of easing has been kept in the oven for another day. For now, investors will have to content themselves with the bare minimum," HSBC's global strategy team said in a note on Friday.

"Without another bazooka, we continue to see USD/JPY drifting toward 95 year-end," they wrote.

The BOJ modestly increased purchases of ETFs, but maintained its base money target at 80 trillion yen ($775 billion) and the pace of purchases of other assets, including Japanese government bonds. The central bank also held at 0.1 percent the interest it charges to a portion of excess reserves that financial institutions leave with the central bank. The dollar fell 1.8 percent to 103.35 yen <JPY=>, its biggest one-day decline since June 24 - the day after the UK's decision to leave the European Union - having earlier fallen below 103.00.

The dollar index fell 0.5 percent to 96.22 , while the euro rose a third of one percent to $1.1110.

Japan's 10-year bond yield soared 10 basis points to -0.17 percent, on course for its biggest one-day rise since April 2008.

BANKS RISE

Japan's Nikkei, which swung in and out of the red after the announcement, closed up 0.56 percent at 16,569 points. The index, which touched a seven-week high last week, rose 6.4 percent in July, its best month since October last year.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.64 percent, sliding back from its highest level since Aug. 11 struck earlier in the day.

The leading index of 300 European shares rose 0.4 percent to 1,244 points, and Germany's DAX  also rose 0.4 percent.

A man looks at an electronic board showing the recent exchange rate between Japanese yen against the U.S. dollar and Japan's Nikkei average (R) outside a brokerage in Tokyo, Japan, June 13, 2016. REUTERS/Issei Kato

Financials led the way, with the euro zone banking index up more than 3 percent and on track for a rise of 9 percent for July, its best month since February last year.

Barclays shares soared 8 percent, the biggest rise in over three years, and UBS shares were up 3 percent despite both banks reporting a fall in profits. Both sets of results were not as bleak as investors had feared.

Investors awaited the release of the stress test results on European banks on Friday night.

Wall Street shares remained near all-time highs, with tech heavyweights Alphabet and Amazon  rising after the bell as their earnings beat expectations.

Futures pointed to a fall of around 0.2 percent at the open on Wall Street on Friday just before the first estimate of Q2 U.S. gross domestic product is released.

Economists expect a rebound to 2.6 percent from 1.1 percent in the first quarter, although the closely-watched Atlanta Fed's GDP Now tracking estimate was slashed on Thursday to 1.8 percent from 2.3 percent.

"Although we continue to look for equipment spending to remain soft in 2Q, real consumption should show a solid rebound," Societe Generale economists wrote in a note to clients.

The 10-year U.S. Treasury yield rose two basis points to 1.53 percent , Elsewhere in the markets, oil fell to three-month lows, now down more than 20 percent from this year's peak in June on growing worries that the world might be pumping more crude than needed. That 20 percent fall puts oil back in bear market territory. U.S. crude futures fell to as low as $40.57 per barrel<CLc1> and were last down 0.9 percent at $40.77. Brent crude futures dropped 1.2 percent to $42.17.

(Reporting by Jamie McGeever; Editing by Tom Heneghan)

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