27 January 2019

Closely following the trend in the US, the Japanese stock market continued its march higher led by cyclicals, particularly technology and factory automation names which were severely sold off last year. Topix is trending towards its critical resistance level of Y1600 where it gapped down from back in December when negative sentiment had reached elevated levels. 

With poor earnings results from key tech names being largely shrugged off as we had been hoping for, we believe earnings results from here look to only unshackle these stocks to run even higher. With the US government shut-down having come to an end, at least temporarily until mid-Feb, one major concern regarding more immediate disruptions ahead look to be behind us for now. 

The next geopolitical hurdle will be the ongoing trade talks between the US and China which as we argued last week should conclude in some sort of a deal with China pledging to eliminate its trade surplus as both countries are looking for a resolution to calm market anxieties. We, thus believe that higher tariffs of 25% on Chinese goods due for coming March will be avoided for now to buy more time to tackle more fundamental issues regarding China's economic structure which US has been calling for big changes in. Talks of WTO starting an investigation into US tariffs on Chinese goods could also help avoid further trade tariff hikes. 

Robert Mueller's latest indictment of Roger Stone, another of Mr. Trump's inner circles of advisors last Friday is another reminder that US political uncertainties are likely to persist for much of this year. This is especially so as the end to the government shutdown is likely to lead the US congress, now majority-led by Democrats, to begin their own investigations into affairs concerning the US president, his family and members of his administration. 

However, with US tax cuts which Mr Trump had pushed for last year now out of the way, we suspect that the market has got what it really wanted from the White House and it is unlikely to be too concerned about the possible impeachment of the US president given that his economic and foreign policies have created much uncertainties which the investors have clearly disliked. In other words, the market might start to regard the potential for Trump's early exit or indeed a one-term presidency as a positive outcome rather than a negative one.