US stocks drift lower while Japanese market remains well supported
It was rather a dull week with US stocks drifting lower led by FANG names, leading NASDAQ below its 50-day moving average once again, but this time on heavy volumes and in our view, looking to head lower in the near term led by tech names. The falling value of FANG stocks has come as a huge relief among active investors who simply could not keep up with S&P or NASDAQ in the past few months given the concentration of big winners among the most heavily weighted index names. Thus, the roll-over of tech stocks has provided a rare opportunity for active fund managers this year to regain some alpha and put more money to work. Indeed, judging by the downtrend of assets parked in US money market funds which had surged to all-time highs of nearly $4.8trn by end of May but it is now around $4.4trn, money managers seem to be reallocating funds to risk assets.
Meanwhile, sentiment in our market in Japan was more sanguine, increasingly adopting a more domestic flavour as the nomination of Suga-san as PM has added some excitement among participants that Japan could outperform should we see more legislative changes under its new leader. Indeed, Topix has been holding its level well during stock sell-offs in other markets. Besides carrying through with the Abenomics doctrine, the new PM is looking to more decisively contain the spread of the Covid virus, speed up digitalisation of Corporate Japan by creating a post in the cabinet specifically to tackle that, remove barriers to allow for consolidation of regional banks and push through his pet project of forcing wireless carriers to reduce service fees, more in line with international levels.
Moreover, speculation that the new PM will give BOJ more breathing room to abandon its allusive inflation target of 2% and focus more on reflating the economy, could also be interpreted as gradually moving away from Kuroda-san’s aggressive QE policy and allowing Japan’s yield curve to steepen to improve banks’ lending margins and raise returns on long term bonds for insurers, pension funds and savers. However, for now the yen remains a key consideration as the Japanese unit tested its early August highs last week following the latest Fed policy meeting, pledging to keep its ultra-loose monetary policy for the next few years.
Geopolitical tensions between US and China at boiling point
With less than seven weeks left to the US presidential elections, we believe we are entering a vital phase when the Trump Administration is at its most unpredictable, as it is looking for a last-minute surge in support to keep the current president in the White House. With TikTok and WeChat ban going to affect this weekend and talks of the Chinese foundry operator, SMIC also likely to join Huawei in the black list, clearly the US government wants to be seen as applying maximum pressure on China which it blames for the pandemic. With its last-minute push to recognise Taiwan as an independent sovereign, and having its fleet roaming the South China Sea, a military skirmish of some kind could not be ruled out as we suspect the US president is capable of anything to sway the US voters his way.
China in turn has continued with its policy of self-restraint, objecting to US actions but not retaliating in any meaningful way. It has also stepped up its US agricultural imports honouring the Phase I trade deal to make up for the Covid disruption earlier in the year. In a way, it feels like the country is playing along with the West and does not want to give any excuse for this growing prospect of a cold war which is mainly waged in the technology arena to spill over to something more serious. Nevertheless, with its sovereignty seemingly under threat, as more countries look to establish official ties with Taiwan, condemning introduction of draconian security laws in HK, not to mention, its reported human rights violation in Xingjian, it is difficult to see how this geopolitical storm could blow over any time before the November 3rd.