Japan’s spat with South Korea continues while corporate earnings outlook dimming
US stock market rally loses momentum as earnings concerns emerge
US stocks struggled to maintain their upward momentum as concerns about slowing global corporate earnings have crept in with weaker activity looking most likely for this quarter and next. Much hope now rests on the shoulders of the Federal Reserve, to lower rates more aggressively than 25bps in the coming meeting at the end of the month and try to stem the slowdown and to sustain this liquidity-driven rally.
ASML and TSMC guidance provide some positives for semis
Nevertheless, semiconductor stocks got a major boost following better than expected outlook from ASML and TSMC. Both provided a more positive picture for investments in cutting edge lines and migration to EUV lithography with demand for logic chips having held up much better than memory.
But end demand not supportive of further tech rerating
However, it is worth bearing in mind that both ASML and TSMC are the best of their class in their respective fields which have gained notable share from their peers over the years with their superior technology and execution. With global end-demand, from autos to servers and smartphones still looking weak, it is difficult to see any major improvements supply/demand for this year as trade worries and other geopolitical uncertainties depress investments.
Weak prospects for Japan earnings outlook
The earnings season is coming into full swing in Japan this week. With its heavy gearing to industrials, notable downward revisions in full term projections look likely, especially given the strength pf the yen. With second half recovery prospects now looking improbable, we think we will see analysts guiding earnings guesstimates much lower for next term.
Japan’s domestic politics could become more relevant
Although Japan’s domestic politics have played have not played a major role in determining market’s direction since the market excitement over Abenomics seven years ago, we are keeping a close eye on events, especially given the growing spat between Japan and South Korea. This could make the outcome of the Upper House vote much more meaningful than in the past.
LDP look to retain its super majority in Japan’s Upper House
At the time of writing this note, LDP is looking likely to have comfortably regained its super majority in the Upper House. With this hurdle out of the way, it will be interesting to see of Mr Abe will now tone down his hawkish stance against South Korea or emboldened by the election results, he ratchets up the pressure by expanding export restrictions. Moreover, Japan’s trade negotiations with the US will begin in earnest as Mr Trump wanted to do Mr Abe a favour and leave the thorny trade issues until the election is passed.
US policy makers have their hands full with Iran and China
With US security advisor, John Bolton dispatched to Japan and South Korea to help resolve the war time and security issues between America’s two big Asian allies whose growing conflict threatens to disrupt the global technology supply chain, US policy makers look to have their hands full. With Iran-related tensions rising and growing pressure to reach a resolution in China’s trade talks, prospects for a positive outcome on all these fronts look increasingly unlikely.
