US economy strengthening while China’s rebound look to be faltering
For Japan whose stock market remains one of the most economic sensitive, recent US payroll numbers showing much stronger pick-up in employment came as welcome news. US treasury yields staged a decent bounce but still remain way below their late March highs when Topix also peaked. With US economic growth looking fairly robust and inflationary pressures likely to remain persistent for the foreseeable future, some market observers anticipate that the Federal Reserve would need to taper its QE sooner rather than later.
Although Covid delta variant continues to spread rapidly across the world, hopes are high that further lockdowns in the West will be avoided as countries will simply have to learn to coexist with the virus. However, for now in China where the variant has spread to 40 cities, the government continues its zero-tolerance approach with some parts of the country going back into lockdowns for the first time since the pandemic began.
With Chinese economic rebound having already shown signs of slowing, fears of further disruptions to economic activity and to the global supply chain are rising once again. Come what may, we think inflationary forces in play look to be only gathering more strength in the near-term which should be exerting more upside pressure on global longer-term rates.
End to Olympics should push Japan’s stock market higher
With Japanese corporate earnings proving fairly robust and the summer Olympics coming to an end, hopes are high that the government will now fully focus on further raising the country’s vaccination rate as infections continue to spread at record pace. This is not only sealing the fate of Japan’s PM, Suga-san who in our view is unlikely to survive his party’s leadership race next month but threatens to weaken the ruling party’s grip ahead of the Lower House elections which must be held by end of October.
Given Suga cabinet’s ineffective policies in containing the contagion, we view these likely changes in Japan’s political landscape more in a positive light and hope for a more assertive leadership. As we have outlined, we continue to believe that the market which has been trending sideways in a narrow range since April could start heading back up with Topix likely to test its upper limit of Y2K by end of this quarter and break out above its March highs in Q4 led by cyclical and re-opening names. In the meantime, stay-at-home and work-from-home plays, many of which we have recommended shorting are starting to show signs of notable underperformance.
However, the big caveat to the above scenario remains the fluid situation of the pandemic. We are watching closely to see if China’s latest efforts to stop the spread of the delta variant can prove effective and whether the country will eventually move away from its zero-tolerance approach as Singapore is starting to. Most importantly, we remain highly vigilant of Covid mutations as recently recognised B.1.621 lineage, or so called the ‘Columbian variant’ is a cause for concern as its breakthrough infections among the vaccinated has led to number of fatalities which warrants close attention.