13 July 2019

US stocks in blue skies territory as liquidity-driven rally continues
As noted last week, the US equity market indices have technically entered blue sky territory which could take us much higher. Market participants seem to be now pretty much ignoring any economic data that deviates from an aggressive monetary policy easing scenario. With Chairman J Powell indicating a more dovish stance in his recent testimonies to the two US legislative chambers, at least 25bps cut is now fully discounted and some still have high hope for a 50bps move to position the bank ahead of the curve.

Federal Reserve veering off data dependence?
With recent employment numbers and consumer prices both healthy enough to suggest some caution in easing too fast, we think a 50bps cut would all but confirm another major u-turn by the US central bank in veering off its data dependent approach which the board have repeatedly underlined in the past. Moreover, such a scenario could leave the Fed facing credibility issues given the pressure by the White House to ease rates more aggressively.

The extent of the US rate cut will provide much light on economic outlook
This liquidity driven melt-up in US stocks could be interrupted should rate cuts in this second half of this year prove more measured than investors are hoping for. Indeed, we feel that the extent of this coming cut in the next FOMC meeting late this month could give us vital clue of how worried the Fed is about the slowing global economy.

Trade uncertainties already causing much damage
What is fairly clear now is that the earnings picture of most global firms are turning ever more gloomy as the US trade dispute with China has caused much damage to sentiment, postponing capital outlays in high-end segments of automation and semiconductors. As we have also underlined, the recent truce between the two sides and resumption of talks is also unlikely to have much of an impact in reversing plans to move manufacturing capacity out of China.

Japanese corporate earnings picture look to be notably deteriorating
Indeed, as we enter the earnings season, early indications from Japanese firms reported thus far strongly suggest that the downward momentum in annual declines in orders have mostly accelerated. We think this leaves significant scope for downward revisions to earnings projections for both this term and next as many analysts had been hoping for a second half recovery which now looks an unlikely prospect. As we explained last week, the strong yen is not helping matters either with the coming consumption tax hike adding more self-inflicted pain.

Japan's export restrictions to South Korea provide more uncertainty
If the Huawei ban wasn't disruptive enough to the tech supply chain, the more recent Japan's export restrictions on some vital semiconductor materials and gases to South Korean chip giants have raised more uncertainties. With South Korean firms, accounting for nearly 40% of global semiconductor capex, having been issued a directive by their government to dramatically reduce dependence on Japanese material suppliers, we think any resolution between the two sides is unlikely to reverse this course. We thus fear, many Japanese tech component and material suppliers are likely to be facing heavy loss of market share in the coming years.