Markets mayhem continue along with growing economic and geopolitical uncertainties

With US inflation gauge still running hotter than any remaining bulls have been hoping for and core inflation at elevated levels, an end to the interest rate tightening cycle still looks way off. As we have argued since summer of last year, we think we need to overshoot to what is considered to be a terminal rate to tame price rises which look increasingly entrenched in global economies. As we have also noted, those betting that food and energy prices have peaked are overlooking the ongoing war raging in eastern Europe with Putin looking increasingly cornered and dangerous.  

Indeed, with OPEC deciding to cut down its supplies of oil ahead of the coming winter, the geopolitical realignment of oil producing nations is redrawing the post WW2 map of those considered friends or foes. Moreover, the recent people’s uprising in Iran in an attempt to overthrow the Islamic regime has further complicated matters dashing hopes that Western governments will revive the nuclear deal with Iran’s current government to remove sanctions and allow Iranian oil back into the market. 

Another development panning out in line with our expectations is the much tighter export restriction of technology to China which we have been writing about since Q4 of last year. Attempts to slow down China’s advancement in semiconductors has become a key focus of the Biden Administration and the prospects of big order cancellations of equipment and material which will undoubtedly hurt many Japanese firms is finally starting to get priced into their share prices. This is adding more woes to the industry which is already reeling from oversupplies and falling end demand. 

With BOJ’s ongoing policy errors of retaining its ultra-loose monetary policy and suppressing long term rates through its aggressive QE leading to further depreciation of the Japanese currency which has now fallen to its 32-year lows against the dollar, imported inflation will likely to continue to eat into Japan’s real wages while producer prices are now rising by nearly 10% YoY. Indeed, Prime Minister Kishida’s popularity seems to have plunged further as suggested by recent polls and his support for BOJ’s policies among other issues are threatening to sink his government. 

UK’s new government is not faring much better with its Prime Minister, Liz Truss having been forced to make a major U-turn in economic policies and sacking her chancellor of exchequer for her own plans to cut taxes which had led to gilts plunging, threatening the pension fund industry and taking the Sterling towards its all-time lows against the Greenback. Chances for her leadership survival also looks fairly grim at this stage. 

With corporate earnings season around the corner, we think earnings results look highly unlikely to bring much cheer for investors as inventory adjustments in the manufacturing sector is likely to continue for some time. We thus retain our negative outlook for stock markets, including our own market in Japan which is highly economic sensitive and should see more downside in the near term led by technology-related segments.