Equity markets looking poised for more gains this quarter
With a short-lived quarter-end profit taking of the previous week out of the way, S&P cleared its symbolic all time high hurdle of 4,000 level as US stocks continued to advance. The strength of the US jobs market for March provided yet another positive surprise as US unemployment rate fell to 6% and job growth recorded its fastest clip since last summer.
The market returned to a pattern similar to Q4 of last year when re-opening/cyclical/value plays advanced together with growth stocks. With the VIX fear gauge index that measures options volatility falling below its 200day line, to the lowest in 14 months and to its pre-pandemic levels, it does seem likely that this quarter will bring yet another strong performance for global equities despite long term rates edging ever higher as worldwide vaccination programs accelerate.
Although our market in Japan lagged somewhat last week, we continue to expect Topix to renew its recent highs of Y2K and advance towards its next big hurdle of 2200 by early summer, led by cyclicals and helped by fast advancing ¥$ rate which has broken above some key resistance lines of late and looks to be heading towards its next key hurdle of 112 level. As we have argued, this is likely to be providing a huge earnings tailwind which should leave corporate earnings projections for the current fiscal year looking very strong, especially as the end to global lockdowns looks to be firmly in sight.
Geopolitical risks still matter and should be watched carefully
As we also pointed out last week, the Japanese government still has some careful manoeuvring to do, ahead of the top-level meeting with their US counterparts which has been slightly postponed to the middle of this month. With Japan under growing pressure to yield to its Western allies to condemn China for alleged human rights abuses, we still believe Japanese consumer brands that have high exposure to Chinese markets look vulnerable to a potential boycott in the country should Japan fold into line.
The coming US and Japan summit is said to also include first steps in laying the framework to improve supply-chain issues, particularly in semiconductors where shortages have been hitting output of many consumer goods, namely autos. With disruption risks of sourcing from Taiwanese chip makers that dominate key segments of the market rising in line with more assertive ‘One China’ policy, the two sides look to co-operate in helping diversify sourcing their semiconductor needs.
US may also seek cooperation from Japan in imposing chip-related export restrictions to China which if implemented could hurt order inflows at Japanese firms should such restrictions go beyond just selling cutting-edge tools and materials. We will keep a very close eye on this coming important summit, as China remains by far Japan’s largest trading partner and rising geopolitical tensions in dealing with China could prove problematic for the Japanese companies concerned.