11 August 2019

Alarm bells are all ringing as outlook worsens
The US stocks market participants seem to be finally coming to a realisation that indeed, all is not well. Although the domestic economy remains fairly sound for now, it is becoming increasingly clear that offshore headwinds are gathering strength and proving a drag on earnings and spending plans. With gold and bitcoin surging and US long term rates falling close to all time lows as yield curve looks to be also heading for an inversion in the long-end, the alarm bells seem to be all ringing as the backdrop for growth is becoming increasingly restrictive.

Investors more dependent on Fed than ever
With what looks to be further cuts of upto 75bps in the fund rate already priced in, Fed needs to cut next month to avert further potential sell-off in stock markets. If it does, it moves the US central bank further away from its data-dependence mandate and making it look increasingly enslaved to appease capital markets, not to mention, the White House.

Currency wars beckon in emerging markets
With grim consequences of trade war with China becoming increasingly hard for bulls to ignore, and most recent corporate earnings guidance already looking optimistic, especially in our market in Japan, downside risks remain fairly high. Moreover, with China hitting back through its carefully orchestrated signal that it will allow the yuan to fall further if the conflict escalates, emerging market bulls must also becoming increasingly nervous of a potential for a currency war with India, Thailand and New Zealand all lowering rates last week.

Japan hard hit by US/China trade disputes
Focusing on Japan, we think market interest will remain fairly anaemic as strong cyclical headwinds are being notably felt. Moreover, Japanese firms are one of the hardest hit from the US/China trade spat as sales of capital goods to China have generally plummeted as uncertainty regarding export routes have shelved spending plans.

Japanese suppliers likely long term losers of growing conflict with South Korea
Japan's growing conflict with South Korea also hurt matters and as we have explained will likely to lead to long term loss of share for Japan's high-tech materials and production equipment. With Korean semiconductor capex accounting for nearly 40% of total, US and European firms look set to gain share at the expense of the Japanese makers which are now looking to quickly shift production bases out of Japan to escape Abe's trade curbs.

V-shaped earnings recovery projections for next term looking increasingly dated
As mentioned above, looking at last quarter's weak earnings among Japanese corporations, it seems almost certain now that most firms will be slashing their full term forecasts during next reporting season with analysts likely to be leading the way. More importantly, we also feel that average forecasts for next term's earnings look increasingly out of touch. Even if earnings bottom out, say by next quarter, a v-shaped recovery assumed in most earnings models look increasingly dated.

Yen/dollar rate likely to hit parity soon
We move on to the Japanese currency which has been among our key topics in the past several weeks. As noted, we believe the yen is likely to strengthen much further, likely to be testing that symbolic parity level against the US dollar in the shorter term, making it one of the world's strongest key reserve currencies. With most Japanese exporters basing their in-house forex estimates around 108 to the dollar and above 120 against the Euro, risks for more forex-related earnings drag look almost certain.