23 February 2019

As noted in our last Weekly Thoughts publication, Topix was looking to break that psychological ¥1600 level which it did at the start of last week, now leaving the next key resistance line at its 100-day moving average line, currently just above ¥1620 in its immediate path. With Japanese stocks continuing to be lifted higher by stock moves in the US, we retain our positive stance on the market, with strong emphasis on remaining long cyclical names, particularly technology and factory automation names whose medium-term secular growth trend remains fully intact despite the short-term cyclical headwinds. 

US stocks continue to climb the wall of worries, absorbing deteriorating macro-economic indicators and poor immediate earnings outlook, confounding the market bears, many of whom had only turned negative in the last quarter of last year and now find themselves being whiplashed by stock moves once again. As was the case last year, we keep a close eye on US geopolitics, economic and trade policies as good lead indicators of where the markets are heading. 

Indeed, the minutes from January's Federal Reserve meeting last week clearly indicated that the central bank's balance sheet shrinkage will be halted sometime this year, further underlining a major monetary policy shift which has even taken us by a positive surprise. Although the board's views on additional interest rate hikes seem more divided we think it is now inconceivable that the Fed will surprise the markets negatively by tightening further.

We think this could clear the path for more yen weakening as we begin to see a more 'risk-on' market stance, leading to rising capital inflows into the US which should weaken the Japanese unit, long regarded as a safe haven currency. The key technical level to watch out for here is ¥$ rate of 111.60 which we also highlighted last week as a crucial line which if cleared, could provide more reasons to buy Japan's manufacturing exporters. 

 

News from US/China trade negotiations front also seemed most encouraging and in line with our expectations as both sides seem to be working on multiple memorandums of understanding that would break the deadlock. The MoUs would cover areas including agriculture, energy, non-tariff barriers, technology transfer, and intellectual property. What was very surprising was Mr. Trump indicating that even Huawei could be let off the hook if trade talks go smoothly just as he had used ZTE as a pawn a few months back to get more concessions out of the Chinese. 

Even on the currency front, the Chinese seem to be making some major concessions which will limit how much they will allow the Yuan to depreciate. Incidentally, this potential agreement is likely to become a major headache for the Japanese which will be entering their own bilateral trade talks with the US next month and have strongly resisted addressing the yen's depreciation as a stimulus policy lever which the BOJ has clearly adopted to drag Japan out of its 20-year economic doldrums.

If our hunch is correct, this could become the fly in the ointment as far as the weaker yen scenario is concerned by May when the US president is due to visit Abe-san in Japan with much familiar leverage no doubt. Needless to add, any agreement on currency stabilisation policy could make life very complicated for Japan's central bank governor, Kuroda-san whom has been putting up a brave face more recently by declaring that there are still plenty of measures available to further ease monetary policies in Japan should the economy require it. In our view, nothing could be further from the truth! 

Moving back to US/China trade talks, with President Trump wanting to conclude the talks personally with the Chinese premier "fairly soon" and the urge of wanting to be seen emerging from the talks himself with a deal in his hand, we think it is all but certain now that further tariff hikes on Chinese imports will be avoided and the March deadline will be pushed outwards to buy time for more progress in other fronts. We also suspect the surprising news of a China's import ban on Australian coal could be related to last week's trade talks as we would not be surprised to hear China agreeing to buy US coal instead as they have done with US LNG, making Mr. Trump look good with the US coal miners whom he has long promised to save from the environmentalists.