18 August 2019

US stocks hold their own in a volatile week
Having digested trade-related anxieties and growing concerns about a global recession, S&P basically traded sideways despite a volatile intra-week market with US 10 year yields falling further towards 1.5% level with yield curve inverting a few times before reversing at the end. With prices of precious metals, oil and base metals, growing geopolitical and economic uncertainty, current stock prices are the weak link in this scenario which thus far have continued to defy gravity.

Pressure on the Fed to ease mounts
With a weakish corporate earnings season now behind us, and manufacturing sector looking to be in or heading towards a recession, all hopes continue to rest on the Fed, to ignore the strength of the latest US retail data and continue to ease its monetary policy. Come what may, the Fed Chairman has lost much credibility, not only for his regarded policy mistakes of last year and his continued miscommunications with the market, but for being perceived to appease capital markets, not to mention, the US president who has continued to demand lower rates and mocked the central bank governor for "not having a clue". In fact, it is difficult to imagine Mr Powell being nominated again for the chair post whoever ends up in the White House in November next year.

Trump dials back his hawkish trade stance towards China
There are also signals emerging that the stock market's recent sell-off is already starting to soften Mr Trump's resolve towards trade negotiations with China. With his latest exemptions on the planned 10% increase in tariffs on China's $300bn of exports to be introduced at the start of September, and US suppliers to Huawei being given another 90 day reprieve to continue their business with the Chinese tech giant, the US side seems once again to be pivoting away from its less hawkish stance.

But China looks to be no mood for concessions
In the meantime, China, under intense pressure internally and externally, especially given the volatile situation in HK, looks to be in no mood to back away from its demands, allowing its currency to hover above 7 against the Greenback while threatening retaliation if any further US tariffs are introduced on its exports. Indeed, sensing that Mr Trump is running out of time to make a deal as we are approaching the last 12 months of the next US presidential election, Chinese policy makers don't seem to be in any rush to make any major concessions. With most recent polls suggesting that the US president could be facing defeat against the leading Democrats running for nomination, this wait and see policy stance is unlikely to change anytime soon unless Trump reverses his tariffs.

Signs of Japanese retail investors returning to domestic stocks
Moving onto our own market in Japan, it is encouraging to learn that retail investors are finally stepping into the market, buying more bombed out stocks that foreigners have been selling all year. Could Japanese stocks finally outperform their DM counterparts? Even in yen terms, Topix has lagged S&P by as much as 20% this year. We will be looking at domestic fund flows more closely to see if domestic investors are indeed stepping back in as their return could have a profound impact on performance of value and high yielding names which have been big under-performers in the last few years.

Likelihood of stronger yen a headwind for cyclical stocks
However, in the shorter term much depends on the direction of the Japanese currency and whether this 'risk off' mode prevails. Having tested that crucial 105 level the Y$ rate has held on above that support line. With BOJ having nothing left in its bag of tricks, we continue to believe that the Japanese unit will remain under intense pressure to appreciate that could leave it around parity against the US dollar. With this backdrop in mind, we think shares of exporters and most cyclical names are unlikely to recover in the near term, especially as many face notable downward revisions in their earnings estimates by the next earnings season.