European stocks and Asian shares rose, U.S. equity futures were unchanged and the yen surged after the BOJ shocked markets and kept its QE program unchanged, defying market expectations of a big boost to its monetary stimulus program.

The session’s key event, last night Bank of Japan policy announcement, the most anticipated in years, was – as we predicted yesterday when we said that it would be impossible for the central bank to meet market expectations – a dud, one which sparked a surge in the yen and sending government bonds and emerging-market stocks lower.

Japan’s currency soared against all of its 31 major peers after the BOJ effectively punted to the next meeting, keeping its government-bond buying target and policy interest rate unchanged, opting instead to double exchange-traded fund purchases to 6 trillion yen ($58 billion) a year, the BOJ said. The result was a 1.5% spike in the yen, bringing its gain this year to about 16 percent.

The BOJ’s expanded stimulus “was as minimal as possible,” said Stefan Worrall, director of equity cash sales at Credit Suisse Group AG in Tokyo. “The tension was extremely high going into the announcement, and the market has reacted in a way that has perhaps reflected that.”

Yields on 10-year JGBs climbed the most since 2013, while rates on similar-maturity Treasury notes increased from a two-week low. As shown below, JGB futures tumbled the most in two years.

Many expected the disappointing BOJ announcement to send equities lower: “the yen’s move shows how the market is disappointed,” Nicholas Teo, a strategist at KGI Fraser Securities, said. “That’s got to trigger a risk-off move in equities. The market had expected very generous stimulus from the BOJ.” However, while the market soared in the past several weeks on expectations of helicopter money, it has failed to retrace any part of the move on the news.

Indeed, while the BOJ announcement sent volatility in FX and rates soaring, after an initial plunge in the Nikkei as much as 2% lower, then rebound, then another plunge, Japan’s stock index rose, and finally closed up 0.6% mostly on the back of a relief rally in the banks which were bought after the BOJ did not cut its negative interest rate even more. “The ETF purchase is directly good for the market,” said Naoki Fujiwara, chief fund manager at Shinkin Asset Management Co. in Tokyo. “The BOJ didn’t go further into negative rates, so it’s good for the financial stocks.”

In Europe, better-than-estimated earnings from Barclays Plc and UBS Group AG helped stocks extend their biggest monthly advance since October. Meanwhile, oil continued to sell off, and is now headed for a bear market, while gold pared a second month of gains.

As Bloomberg reports, a month of big swings in the $5.3 trillion-a-day foreign exchange market is set to end with a bang as markets digest the BOJ’s decision, and in a few hours the U.S. is set to report Q2 GDP, where it is expected to show a pickup in economic growth and results of bank stress tests in Europe. Earlier today Europe reported its own Q2 GDP which came in line with expectations at 0.3%, half of the growth rate seen in the first half.

Ignoring the BOJ disappointment, the Stoxx Europe 600 Index climbed 0.4%, taking its monthly increase to 3.2%. The rebound hasn’t been enough for the gauge to recoup its losses following the U.K. vote to quit the European Union. Barclays jumped 6% as its core units posted adjusted pretax profit that topped projections and UBS climbed 2.8 percent. Italy’s Banca Monte dei Paschi di Siena SpA rallied 7.1 percent after it received a proposal. Stress-test results are due at 10 p.m. Milan time on Friday. Electricite de France SA surged 9.4 percent as its earnings beat projections and it maintained its 2016 objectives. The British government cast doubt on the future of a nuclear-power project in the U.K. ArcelorMittal rose 5.1 percent after posting its highest quarterly profit since 2014.

While the S&P 500 Index futures slipped 0.2 percent, we expect initial weakness to be bought and US stocks will close well in the green, adding to July’s 3.4% gains. Google parent Alphabet advanced 3.5 percent in early trading after reporting second-quarter earnings and sales that beat analysts’ estimates as growth in cloud-computing and corporate software businesses improved. Amazon.com Inc. rose 1.4 percent as profit topped projections.

The MSCI Emerging Markets Index slid 0.7 percent, leaving it 4.3 percent higher on the month. Both gauges are headed for the best month since March.

The yield on Japan’s 10-year bonds jumped eight basis points to minus 0.19 percent, set for the steepest increase May 2013, based on closing prices. Yields on Treasuries with a similar maturities rose two basis points to 1.53 percent, having been at 1.48 percent earlier, the lowest since July 14. Treasury yields are still set for a weekly drop after Fed officials signaled this week they are in no rush to raise interest rates, even as they noted that near-term risks to the economic outlook have diminished. The economy probably grew at a 2.5 percent annualized rate from April through June, according to the median estimate of 76 forecasters before Friday’s release.

On today’s calendar, the US Q2 GDP report is front and center however there’s also other important data in the form of the employment cost index (expected to be +0.6% qoq), Chicago PMI for July (expected to decline 2.8pts to 54.0) and the final revisions to the July University of Michigan consumer sentiment report. There’s also a bit of Fedspeak to contend with with Williams and Kaplan  both scheduled.  Investors are also watching earnings from companies including Merck & Co., Exxon Mobil Corp. and Chevron Corp. for further clues on how global monetary stimulus is filtering through the economy. A potential key risk event will the be the European stress test announcement which may impact Italy’s insolvent Monte Paschi, which is rushing to arrange a last minute bailout plan.

* *  *

Market Snapshot

• S&P 500 futures down 0.1% to 2163
• Stoxx 600 up 0.4% to 341
• FTSE 100 down 0.2% to 6708
• DAX up 0.5% to 10325
• German 10Yr yield up 2bps to -0.07%
• Italian 10Yr yield up less than 1bp to 1.21%
• Spanish 10Yr yield down less than 1bp to 1.09%
• S&P GSCI Index down 0.9% to 333.5
• MSCI Asia Pacific up 0.5% to 136
• Nikkei 225 up 0.6% to 16569
• Hang Seng down 1.3% to 21891
• Shanghai Composite down 0.5% to 2979
• S&P/ASX 200 up 0.1% to 5562
• US 10-yr yield up 2bps to 1.53%
• Dollar Index down 0.37% to 96.38
• WTI Crude futures down 1.3% to $40.62
• Brent Futures down 1.9% to $41.89
• Gold spot down 0.3% to $1,332
• Silver spot down 0.6% to $20.05

Top Global Headlines

• Hillary Clinton Accepts Democratic Nomination, Attacks Trump: Democratic nominee reaches out to supporters of Bernie Sanders, calls Trump’s vision for nation “Midnight in America”
• BOJ Opts for Limited Stimulus Expansion, Plans Policy Review: board expands ETFs; no change to bond purchases, negative rate; Kuroda calls for assessment of effectiveness of BOJ policy
• Google Results Show Signs of Cloud Progress Under Greene: “other revenue” jumps 33% to record on cloud and apps momentum; Alphabet Beats Analysts’ Estimates on Mobile Ads, Cost Controls
• Amazon Cloud Unit Helps It Stay Profitable While Investing: co. takes on Netflix, Wal-Mart and Flipkart at once; co. forecasts sales that may beat estimates on Prime Day
• Facebook Gets $3-5b IRS Tax Notice Over Ireland Move: IRS issues notice for 2010 tax year over operations transfer; co. plans to challenge notice in federal tax court
• UBS Scraps Near-Term Targets as 2Q Profit Declines: scraps near-term guidance after 2Q profit slipped 14%
• Sanofi Ready for Swift Action on Medivation as Earnings Drop: co. ready to act swiftly to reach a deal with Medivation as 2Q profit and sales declined
• Chubb Promotes Kessler to Reinsurance Chief; O’Farrell Exits: Kessler was previously chief actuary of an international unit
• America Movil Profit Misses Estimates as Revenue in Mexico Dips: carrier’s Mexico margins narrow amid stiff competition
• TerraForm Power Said to Plan September Auction of Its Shares
• Thoma Bravo Said to Seek Sale of Deltek for Up to $3b: Reuters
• N.Y. Fed Said to Be Moving On-Site Examiners Out of Banks: WSJ
• Ex-Goldman Exec Sues Bank Seeking Legal Fees in Fed Probe: WSJ

* * *

Looking at regional markets, Asia stocks traded mostly lower following disappointment from the BoJ policy decision after the central bank refrained from cutting rates deeper into negative territory and also kept its rise in monetary base unchanged. This initially pressured the Nikkei 225 (+0.6%) although banking names benefitted from the pause in rates. ASX 200 (+0.1%) saw upside capped by energy weakness following the continued drop in WTI Crude prices, which tested USD 41/bbl to the downside while Chinese markets were in the red with Hang Seng (-1.3%) weighed on by subdued earnings from CNOOC while losses in Shanghai Comp (-0.5%) were stemmed by a larger net-weekly liquidity injection. 10yr JGBs are lower with prices declining by over a point which was the most since 2013, following the BoJ disappointment. BoJ disappointed markets and kept its policy rate unchanged at -0.1% and held the annual rise in monetary base. at JPY 80tIn via 7-2 vote with Sato and Kiuchi as the dissenters. The BoJ instead announced to expand purchases of ETFs to JPY 6.0tIn from JPY 3.3tln and doubled programme of USD lending from USD 12bIn to USD 24b1n.

Top Asian News

• Japan Bank Shares Are Biggest Winners From BOJ’s Policy Decision: Banks including Mitsubishi UFJ jumped
• Sony Posts Surprise Profit as Games Outweigh Sagging Sensors: Net income 21.2b yen for 1Q ended June 30 vs est. 39b yen loss
• Sembcorp Joins Keppel With Profit Plunge as Oil Damps Demand: Slashes FY16 capital expenditure to half of previous year’s
• Cnooc Warns of $1.2b Loss Amid Canada Oil Sands Writedown: Co. expects first loss since Hong Kong listing in 2000
• India Lifts Veil on Army as Modi Moves to Spend $150b: Private-sector executives climb on tanks, speak with soldiers

European equities have kicked off the final trading day of the week higher despite some overnight disappointment from the BoJ. Although, financial names have been supported from a lack of further rate reductions which in turn saw Nikkei 225 (+0.6%) finish in the green. Furthermore, this filtered into the upside in European financial names, while gains in Barclays (+5.7%) have also been attributed to their firm earnings update, however the FTSE 100 does remain the notable laggard with the index hampered by lacklustre earnings from the likes of IAG, Pearson and Reckitt Benckiser as well as softness in energy heavyweight Shell. In terms of outperformers, the FTSE MIB (+1.8%) leads the region amid the strength in Monte Paschi (+6.9%) shares as reports have been circulating that the bank may receive an 11th hour rescue ahead of the ECB stress test results at 2100BST. Aside from equities, across fixed income markets, Bunds gapped lower at the open to hover around 167.00 level as the lack of significant action by the BoJ saw JGB yields with their third largest surge on record. However, for much of the morning, Bunds have pulled off its lows as the downside in oil prices, alongside month-end extension buying has led to somewhat of a short squeeze.

Top Asian News

• Euro-Area Economy Slowed Before Brexit Vote Put Outlook at Risk: growth eased to 0.3% in 2Q, down from 0.6%; inflation in the region unexpectedly picked up to 0.2% in July
• Barclays Rises as Cost Cuts, Trading Gain Outshine Profit Drop: bank posted $1.4b pretax loss at non-core division; fixed-income trading revenue climbed 10% in quarter
• AB InBev Rises on Optimism SABMiller Deal Will Get Done: shares gain as much as 2.5% in Brussels after earnings miss
• BBVA Jumps as Earnings Beat Estimates on Better Lending Returns: net interest income and fees rebounded from slow 1Q
• Mediaset Rejects Vivendi’s Alternative Offer for TV Alliance: Italian broadcaster seeks to enforce deal to sell Premium unit; board authorizes ‘all necessary measures’ to respect contract
• Statoil Buys Petrobras Oilfield for $2.5b Amid Crude Rout: biggest Statoil acquisition since 2011 not expensive: analyst
• British Airways Owner Slashes Targets, Cuts Capacity on Brexit: IAG predicts only “low double-digit” profit increase for 2016
• EDF 1H Profit Drops After Writing Down Value of Assets: French utility extends depreciation period on nuclear plants

In FX, the yen climbed 1.5 percent to 103.65 per dollar at 10:25 a.m. in London, bringing its gain this year to about 16 percent. BOJ Governor Haruhiko Kuroda led his board in voting to increase its ETF program to 6 trillion yen ($58 billion) a year, the BOJ said. The announcement comes after decisions this month from the Federal Reserve, the European Central Bank and the Bank of England to leave their key interest rates unchanged as they assessed the economic fallout from the U.K.’s vote to leave the European Union. “The BOJ’s disappointment, which also follows the ECB and BOE’s recent decisions to hold off easing, may just cause markets to re-assess whether they had front-run things too much,” said Khoon Goh, head of Asia research at Australia & New Zealand Banking Group Ltd. in Singapore. Away from the yen, foreign-exchange markets were more subdued. South Korea’s won strengthened 0.4 percent against the dollar to lead gains among emerging-market currencies. The Chinese yuan slipped 0.1 percent, paring a weekly gain. The euro increased 0.3 percent.

In commodities, oil headed for the biggest monthly decline in a year as brimming crude and fuel inventories spurred a retreat toward $40 a barrel. West Texas Intermediate crude dropped 1.2 percent $40.64 a barrel, extending declines from a peak in June to more than 20 percent. Brent oil in London slid 1.8 percent to $41.92. Spot gold slipped 0.3 percent to $1,331.95 an ounce after earlier rising in the wake of the BOJ decision. Industrial metals retreated, with copper losing 0.3 percent in London and nickel falling 1.4 percent.

On today’s calendar, the US Q2 GDP report is clearly front and center however there’s also other important data in the form of the employment cost index (expected to be +0.6% qoq), Chicago PMI for July (expected to decline 2.8pts to 54.0) and the final revisions to the July University of Michigan consumer sentiment report. There’s also a bit of Fedspeak to contend with with Williams (2.30pm BST) and Kaplan (6.00pm BST) both scheduled. Away from that, the EU bank stress tests at 9pm BST will draw huge interest over the weekend. On the earnings front it’s another busy day with 18 S&P 500 companies reporting including Merck, Exxon Mobil and Chevron all at or just prior to the open. In Europe both UBS and Barclays will report, along with Monte dei Paschi.

* * *

Bulletin Headline Summary from RanSquawk and Bloomberg

• The BoJ stood pat on rates and their monetary base, although did make adjustments to their ETF and USD lending programmes
• European equities trade higher as financial names lead the way amid upbeat earnings and the BoJ not delving deeper in to negative territory
• Looking ahead, highlights include EU Bank Stress Tests, US GDP, PCE and Michigan Sentiment and potential comments from Fed’s Williams

DB’s Jim Reid concludes the overnight wrap

The BoJ continue their fight to take the Japanese economy to higher ground at this morning’s long awaited meeting. As expected, they’ve eased but the extent to which will be seen as a bit disappointing. ETF purchases have been expanded to ¥6tn (almost doubling the prior target), while the -0.1% base rate has been maintained and the pace of QE purchases held at ¥80tn per year. Kuroda has also ordered an assessment of the effectiveness of BoJ policy to be undertaken at the next meeting scheduled for September which is interesting. The Yen is +1.97% stronger following the news at 103. The Nikkei initially plummeted 2%, then rallied all the way, and has now plummeted 2% again. It feels like Kuroda might be doing some damage control come his press conference later this morning.

The announcement follows a bumper set of data out of Japan this morning. The most notable was the CPI report where headline inflation stayed put at -0.4% yoy as expected in June. The core declined one tenth to -0.5% yoy (vs. -0.4% expected) while the core-core declined two-tenths to +0.4% yoy (vs. +0.5% expected). Retail sales rose a below market +0.2% mom (vs. +0.3% expected) and overall household spending tumbled -2.2% yoy in June (vs. -0.4% expected), down from -1.1% in May. On the positive side, industrial production grew more than expected in June (+1.9% mom vs. +0.5% expected) and the jobless rate fell one-tenth to +3.1% in June (vs. +3.2% expected) which is the lowest in 21 years.

The rest of the bourses in Asia are weaker post the BoJ too. The Hang Seng is -0.82%, while the Kospi and ASX are -0.12% and -0.26% respectively. Markets in China are down a smidgen (Shanghai Comp -0.10%). It’s also worth noting that JGB yields have risen steeply. The 10y is 10.3bps higher currently at -0.182% and heading for the biggest one day move higher in yield since May 2013.

Today also sees the EBA bank stress tests released at 9pm BST. On this round there will be no pass or fail, just a host of information with the ultimate test outcomes feeding into supervisors’ review and evaluation process. 51 banks with a minimum of €30bn in assets and representing about 70% of total EU bank assets will be covered. The list also includes five Italian banks, however the total number of banks covered is down from 123 in the 2014 tests. The data released should be vast though and the 12,000 or so data points we got in 2014 should represent a reasonable example of the level of granularity to expect.

One of the criticisms before they’ve even been released the results is that one of the key stresses is what would happen under rising yield scenarios. It doesn’t seem to us that any scenario for prolonged negative yields are being modelled. Most banks would be delighted to see rising yields at the moment!! Also one might ask how much investor’s rely on it as since the last stress test in October 2014, where 99 out of 123 passed, the Euro bank equity index is down 38%. Having said that it will be a mine of information and much attention will focus on the Italian banks. We could still get an announcement on how Monte Paschi’s situation will be dealt with before or after the results. The FT is reporting that veteran Italian businessman Corrado Passero has teamed up with UBS to offer a last minute alternative rescue proposal, so keep an eye on that this morning. For more on explaining the Italian banking situation see my team’s note from Wednesday morning on bank capital from Michal Jezek. It’s not the main purpose of the note but the background is covered. Email him at Michal.Jezek@db.com if you haven’t got a copy.

The third part of the three-pronged attack of big events today is the Q2 GDP report in the US. Yesterday was a pretty important day for data in light of last minute revisions to today’s print. We learnt that the advance goods trade deficit in June widened more than expected to $63.3bn from $61.1bn after an increase in imports more than outweighed the modest increase in exports. Also important was the Census Bureau Report on Advance Economic Indicators which for the first time shed light on wholesale and retail inventories for the last month of a quarter prior to the GDP report. The report showed that wholesale inventories were little changed in June but retail inventories rose +0.5% mom. Given the trade and inventory data, the Atlanta Fed cut their Q2 GDP forecast for the second time in two days and now have growth pencilled in at +1.8% (from +2.3%). Market consensus is +2.5%, however DB’s Joe Lavorgna is at the low end of the forecasts with a +1.0% expectation.

Meanwhile, on the long and winding road towards Brexit it was interesting to see AstraZeneca up +7.19% and at all time highs yesterday. Clearly much of the +29% rally since Brexit is down to it being a dollar earner but a large part of yesterday’s move was put down to speculation (reported on numerous newswires including Bloomberg) that Novartis might be interested in acquiring it. Given the recent fall in sterling it’s fair to say that UK M&A (or talks of it) has picked up. Now it’s not clear that such a move for a multinational company is that relevant for the UK economy but it’s interesting that Brexit isn’t causing a lack of interest in UK based companies. One wonders whether the new UK PM would welcome such a stamp of approval in UK plc if it happened or whether she would be tempted to block it given her comments that the UK should be much more discriminative about selling its major companies to foreign owners. A dilemma.

Bookended by a slightly hawkish Fed reading on Wednesday and the anticipation of today’s BoJ, US GDP and EU stress events, yesterday in markets was all about the bumper release of corporate earnings out on both sides of the pond. Overall the numbers were relatively mixed. Facebook shares closed up +1.5% following the strong results after the close on Wednesday. Google parent company Alphabet rose +0.5% into the close and a further 5% in extended trading after beating both earnings and revenue estimates with some encouraging growth seen in cloud-computing. The other tech heavyweight to report was Amazon which continued the trend of both better than expected earnings and revenue for the quarter. In fact revenues were up an impressive 31% yoy with cloud computing also at the centre of that growth. Shares were up 5% in extended trading.

On the flip side, Ford Motor’s numbers were a little disappointing relative to market expectations, sending shares down 8%. Earnings per share trailed consensus by 8c, while the automaker also painted a bleaker picture for the second half of the year. Interestingly management also provided some quantitative guidance around the Brexit impact (the first that we’ve really seen) saying that they will likely face a headwind of $200m this year and $400-500m in each of 2017 and 2018 as a result.

Meanwhile in Europe Lloyds Bank profit declined less than expected, but shares fell 6% over capital concerns, with the bank also announcing 3000 job cuts after warning of an economic slowdown driven by Brexit. Rolls-Royce shares rallied 14% however after reporting a big beat in earnings, raising hopes that we might be starting to see a turnaround following five profit warnings in less than three years. Shell (-3%) reported the lowest quarterly earnings in 11 years, which also happened to be worse than expected.

European equity markets closed weaker with banks in particular under pressure following the Lloyds results and ahead of today’s stress tests. The Stoxx 600 closed -0.95% and peripheral bourses closed a 2% handle lower. Across the pond equity markets initially started on the back foot but bounced back into the close. The end result was little change on the day with the S&P 500 closing +0.16% and Dow -0.09%. The ongoing tumble for Oil continues to rumble away in the background meanwhile. WTI was down another -1.86% yesterday to close a shade above $41/bbl. It’s down over $3/bbl this week and it means that the -20.5% decline from the June 8th intraday highs puts oil back in a bear market. More data which underscored the pressure on building US inventories was blamed on the latest leg lower. Equity markets have largely ignored or to some extent decoupled from the move lower in oil over the last month or so. Brexit and the overwhelming focus on more central bank stimulus has taken over as the dominating factor.

In terms of the remainder of the data yesterday, in the US initial jobless claims ticked up 14k last week to 266k, although the four-week average continues to hover around a relatively lowly 256k. Meanwhile the Kansas City Fed’s manufacturing survey was a little disappointing with the print falling 8pts to -6 (vs. +2 expected). Elsewhere, Germany reported CPI a little higher than expected in July (+0.3% mom vs. +0.2% expected), which helped to nudge the YoY rate up one-tenth to +0.4%. Finally Euro area confidence indicators were resilient in July post Brexit. The headline economic confidence indicator rose 0.2pts to 104.6 (vs. 103.5) while indicators for business climate, industrial and services sectors all improved relative to June.

Looking at today’s calendar now, this morning in Europe we’re kicking off in France where shortly after we go to print France will report its Q2 GDP report. Germany retail sales follow this before we’re back to France with the July CPI report. The UK then follows this with the June money and credit aggregates data before we then get the July CPI report, June unemployment reading and Q2 GDP report for the Euro area. This afternoon in the US the aforementioned Q2 GDP report is clearly front and centre however there’s also other important data in the form of the employment cost index (expected to be +0.6% qoq), Chicago PMI for July (expected to decline 2.8pts to 54.0) and the final revisions to the July University of Michigan consumer sentiment report. There’s also a bit of Fedspeak to contend with with Williams (2.30pm BST) and Kaplan (6.00pm BST) both scheduled. Away from that, the EU bank stress tests at 9pm BST will draw huge interest over the weekend. On the earnings front it’s another busy day with 18 S&P 500 companies reporting including Merck, Exxon Mobil and Chevron all at or just prior to the open. In Europe both UBS and Barclays will report, along with Monte dei Paschi.