Barclays leads FTSE 100 higher after Bank of Japan stimulus package

Discussion in 'Market News' started by Lily, Sep 21, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
    Likes Received:
    Financial firms lift markets ahead of US Federal Reserve meeting

    Financial shares are rallying strongly after the Bank of Japan introduced further stimulus measures to boost its flagging economy.

    Barclays is the biggest riser in the leading index, up 5.5p at 171.95p. It has also been helped by analysts at HSBC moving their recommendation from hold to buy and raising their target price from 150p to 190p. They said that selling Barclays’ unwanted assets would add value to the business.

    European markets are following Asia higher - with banks and financial companies leading the charge after the Bank of Japan surprised the market. With the market divided on whether the Bank of Japan would increase stimulus or cut rates further, Governor Kuroda decided to think outside the box and scrapped their set monetary base goal with the intent of targeting yields of various maturities, thereby creating a steeper yield curve.

    The shape of the yield curve has, in the past, been a very clear predictor of future economic activity. A flat yield curve gives no incentive for banks to lend, and typically presages an imminent economic slowdown. A steeper yield curve provides the motivation for banks to encourage customers to borrow, and is typically associated with a strengthening economy. Given that financial companies borrow short and lend long, today’s announcement by the Bank of Japan has provided the rocket fuel for Japanese banks to rally strongly. The major question is how effective this policy will be.

    Markets are expecting a hike sometime in the next few months, just not today, which suggests that any move by the Federal Reserve Open Markets Committee today would catch the markets completely unprepared.

    This would have the potential to be a rather risky option for the Fed, despite significant enthusiasm from several members of the committee to go now, which means if the Fed were to move today, Janet Yellen’s press conference would then be an exercise in expectations management, though this would be equally true if they hold rate, as is widely expected, though it would be an easier task to manage.

    While the share has fallen 17% post the third quarter, we continue to have 18% downside to our unchanged 220p target price. On more than 80 times 2016 estimated enterprise value/EBIT, Ocado continues to look expensive relative to Amazon on 72 times.

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