16 June 2019

Japan's stock market continued to trend sideways as concerns about weaker global corporate earnings outlook continue to weigh on share prices. With looming trade war between US and China clearly spilling over to the real economy and earnings, we see weak prospects for a stock market rebound in the coming few weeks. This is especially so for Japanese firms if the yen continues to strengthen as a safe haven currency and the yen/dollar rate breaks that key support level of 108, leaving 105 level as the next line of defence. 

With recent weak earnings guidance by Broadcom (AVGO) which has been severely impacted by the Huawei ban, underlining the negative indirect impact of the trade war, any hopes for a recovery in demand for the tech sector which had led the stock market recovery in the first four months of the year looks to have been postponed from H2 of this year to H1 of next year. With memory chip prices under further downward pressure while foundries also talking about deteriorating visibility, clearly the coming earnings season is unlikely to bring much cheer for investors. 

With US policy makers echoing Mr Trump's ultimatum by threatening the Chinese side to come to the negotiation table or "else", we think the possibility of President Xi skipping the coming G20 Summit altogether has risen considerably. If Xi attends, he could be seen by the politburo as weak and yielding. We think China is highly unlikely to negotiate with a gun to its head as they have already indicated in their comments regarding the failure of past talks. So either the Americans are under-estimating the resolve of China or they are purposely threatening the Chinese, knowing that they will not resume trade talks under these conditions to perhaps blame them on the breakdown of trade negotiations and expand the scope of tariffs.

More worryingly, we suspect that the growing spat between the two sides has now way past just trade issues. We are concerned that the hardliners within China's Communist party are already ringing alarm bells about the latest US arm sales to Taiwan, about Pentagon making it clear in its latest report that Taiwan's independence is deemed to be in the US national interest that goes against the 'One China Policy', not to mention, the US bipartisan show of support for HK demonstrators which Chinese policymakers objected to. Falling number of US visas issued to Chinese is yet another major sign that the US could have already kicked off the cold war between the two sides.

So much of the market hopes have shifted away from a positive outcome for trade to prospects for a more immediate relief from the US Federal Reserve, to loosen its monetary policy as soon as next month. Should the US central bank take a more 'wait and see' approach as some seem to suggest, then fear of policy mistakes which hit share prices in December of last year could back to haunt the market.