28 July 2019

US stock market melt-up continues led by technology names
The liquidity-led rally in US stock market continues as technicals remaining fairly positive with S&P at another record high. Expectations for further rate cuts have remained highly supportive of this asset price melt-up. The earnings season has thus far been a mixed bag with industrials seeing more signs of slowing while semiconductor names which have led the stock market's latest leg up are becoming hopeful about a bottoming out scenario by the year-end. To be sure, much of the end-demand growth seems to be for 5G-related chips and mainly for network equipment while overall demand from smartphones and servers remain subdued.

Fed's decision on how much to lower rates has strong implications for yen
With Fed's coming rate cut now around the corner, its decision whether to lower rates by 25bps or 50bps look to set set the pace of global central banks' race to the bottom for the remainder of the year. Although the Fed has some room to reverse course and lower rates, Japan's monetary policy options look all but exhausted, leaving further appreciation in the yen seem increasing probable. It has also become more apparent that during the 'risk on' market phases, the yen has not managed to notably depreciate against the dollar while during the 'risk off' phases it tends to strengthen as one would expect.

BOJ in state of denial on its policy options to reflate
Despite BOJ's unrelenting statements about its ability to provide further stimulus if it needs to, we think side-effects of its zero rate policy and its oversized quantitative easing have left almost no room to further reflate the economy through monetary measures. With banks, insurers, pension funds and savers all hurting from negative yields, JGB market liquidity having all but dried up, and the central bank's ETF purchases having created notable distortions in the stock market, patience is running thin for Mr Kuroda's tunnel vision pursuit of raising inflationary expectations.

LDP's failure to retain its super majority in Upper House unlikely to deter Abe
With Japan's ruling LDP party not managing to regain its super majority in the Upper House elections which was needed to pursue Mr. Abe's signature policy of changing Japan's pacifist constitutions, hopes are that the Japan's prime minister will focus more on structural economic reforms (Abe's illusive third arrow) Japan needs going forward. However, with the Japanese government continuing to lock horns with South Korea, it seems unlikely that Mr Abe will veer off its core political agenda.

Japan to decide this week whether to keep South Korea on its 'whitelist'
Staying on the South Korean issue, last week's visits to both countries by the US security advisor, John Bolton seems to have unsurprisingly failed to resolve the rift, so much so that the US administration has declared that it will not get involved in this growing conflict that threatens to disrupt the technology supply chain. With air of distrust having quickly spread on both sides, we are watching events closely as Japan will decide in the coming Friday on 2nd of August whether it will remove South Korea from its 'whitelist' of preferred trading partners and expand its export restrictions.

China/US trade talks to resume but Trump warns of China resisting
On the bigger trade conflict between US and China, high level trade negotiations will resume this week. However, Mr Trump's latest tweet that China will most probably resist striking a deal and it is likely to wait it out until after the US presidential election next year does indicate that any resolution, even if achieved could be months away. Indeed, China seems to have put forth its own hawkish technocrats to be more closely involved in the trade talks this time round.

China is unlikely to yield in changing its industrial policies anytime soon
Given what we know now, we struggle to grasp how China could abandon its industrial policies and halt nurturing of its technology segments without ceding government control. This is especially so given the current political climate regarding HK and Taiwan. If anything, China will be fully supporting its tech industry to strive to become more independent given the potential supply chain disruptions they face.

While US is unlikely to immediately lower tariffs
Moreover, in order for Mr Trump to reverse all his recent tariff hikes on Chinese imports as China is demanding as show of good will, he would need something substantial in return to show his supporters ahead of next year's elections. The Huawei ban is also another thorny issue which can't be easily reversed by the US president as there is strong bipartisan support to retain the restrictions on the Chinese tech giant as many US policy makers have voiced their concerns about bartering national security threats in the coming trade negotiations.