David Fuller and Eoin Treacy's Comment of the Day
Category - Japan

    Greed & Fear Negative SPX, Sees $130-$150 Oil Price

    Thanks to a subscriber for this note summarizing the recent Raymond James Conference presentation by Christopher Wood. Here it is in full:

    A few key takeaways (ask for replay)
    a) has been negative USA , SPX P/S still very expensive at 2.5x, US M2 has risen by 40% in absolute terms since March 2020 (annualised rate of 15%), has slowed to an annualised rate of just 0.6% in the six months to July.
    b) USA CPI ex-energy has been flat, while headline CPI down (due to oil price)
    c) we see OIL price rising back to $130-$150, which would mean inflation expectations would rise too (0.80 correlation)
    d) fossil fuel still 82% of global energy consumption
    e) reminder EM equities vs US dollar index : 0.72 negative correlation
    f) Indonesia has been our favorite market this year, credit growth rising
    g) China property market woes outweigh infrastructure stimulus
    i) we are neutral China
    j) if YEN breaks 150 and we see 3% inflation in Japan, then base case is focus will be put on defending further Yen weakness
    k) YEN is cheapest since 1971
    l) India remains our favorite market on a 10 year view , we are heavy financials & property in India, housing affordability good
    m) very underweight Australia (though + energy). Negative Australia housing as interest rates rising, home price declines accelerating

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    The Tension in Japan's Dialed-Up Defense Ambitions

    This article from Bloomberg may be of interest to subscribers. Here is a section: 

    DM: The government has begun a comprehensive review of Japan’s defense strategy. Why is that important and what are the likely outcomes?

    SS: A new national security strategy document is going to be issued. The first leader to issue was Shinzo Abe, in 2013. So this will be only the second statement by Japan, ever. It’s significant this is all together in one place, not just bombs and bullets. It’s about what Japan needs to do to achieve its interests in the world and how to proceed? In 2013, the language on China was pretty benign compared with what I think we will see in the next one. Russia will be near the top of concerns after the Ukraine invasion. North Korea continues to be a problem, given its missiles and the ability to launch them undetected.

    There will also be a cabinet decision in December on the next 10-year defense plan. This is where we will see how serious Kishida is about defense. Within the 10-year plan will be a five-year plan on how much Japan spends and on what. The other issue that needs to be handled deftly is that of counterstrike capability.

    DM: Japan is one of the most indebted economies. How does all this get financed? 

    SS: I don’t know how they pay for it. Debt servicing is somewhere near 23% of Japan’s budget. Social security is about a third. The budget doesn’t have a lot of latitude. I’m not convinced about 2% of GDP, but let’s use that as a reference point. Last year, Japan spent about 1.3% of GDP on defense. You get to 2%, you are basically doubling it. That’s big.

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    Summers Says Fed 'Let Us Down Quite Badly' and Still Unrealistic

    This article from Bloomberg may be of interest to subscribers. Here it is in full:

    Former Treasury Secretary Lawrence Summers issued one of his harshest criticisms yet of the Federal Reserve’s slowness in moving to raise interest rates, and warned that policy makers are still presenting forecasts that are unrealistic.

    “In 2021, our central bank let us down quite badly,” hurting policy makers’ credibility, Summers said on Bloomberg Television’s “Wall Street Week.” “It made mistakes in the core functioning of a central bank,” including in its failure to lean in against fiscal stimulus last year, he said.

    Among the errors has been a “repeated poor forecasting record -- and I have to say that it’s not something that’s been fully fixed,” Summers said. The June median Fed official predictions showed inflation coming back toward the 2% target but unemployment only reaching a high of 4.1% by 2024 -- a “highly implausible” result, he said.

    “Frankly I think in 2021 our central bank lost its way. It was talking about the environment, talking about social justice in a range of things,” Summers, a Harvard University professor and paid contributor to Bloomberg TV, said. “It was confidently dismissing concerns about inflation as transitory.”

    Turning to Japan, which has seen its currency tumble to the weakest since 1998 as the Bank of Japan declines to join its peers in tightening policy, Summers said it’s likely to be a challenge to exit the current zero-yield targeting regime.

    Dollar’s Impact
    “Sooner or later they’re going to leave the yield curve control strategy and I’m not entirely sure what’s going to happen when they do,” Summers said. “In the meantime, the pressures are likely to build,” with the potential for “an even weaker yen,” he said.

    While some emerging markets are also suffering from a strengthening dollar, Summers said that he didn’t see a “systemic” crisis along the lines of 1998. Still, countries with “particularly unsound policies” including Turkey and Argentina are a concern, he said.

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    China Tries to Tamp Down Nationalist Fervor Over Abe Shooting

    This article from Bloomberg may be of interest to subscribers. Here is section:

    The Foreign Ministry struck a softer tone on Friday. China was “shocked” by the attack, spokesman Zhao Lijian said at a regular press briefing in Beijing just before news that Abe had died, saying the nation hoped he would recover soon.

    “This unexpected incident should not be linked with China-Japan relations,” Zhao added. When asked about some nationalist voices in China cheering the shooting, Zhao declined to “comment on the remarks of net users.”

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    Currency War Breaks Out in a World Short on Fixes for Inflation

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The European Central Bank’s Isabel Schnabel started it. In February she flashed a chart showing how much the euro had weakened against the US dollar. Two months later, the Bank of Canada’s Tiff Macklem bemoaned the decline of the Canadian dollar. Swiss National Bank President Thomas Jordan suggested he’d like to see a stronger franc. The US dollar had been soaring—now up 7% for the year—as the Federal Reserve prepared to aggressively combat inflation.

    And so one by one, central bankers elsewhere, just as desperate to tame the relentless march of inflation in their own backyards, began sending not-so-subtle signals that they would for once welcome a stronger currency—which helps reduce the cost of imports by boosting buying power abroad. It’s a form of intervention so rare that their jawboning alone moved markets.

    On June 16, two of them upped the ante: Switzerland surprised traders with the first rate increase since 2007, sending the franc soaring to its highest level in seven years. Hours later, the Bank of England announced its own rate increase and signaled bigger hikes to come

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    Chinese Yuan Extends Drop to Six-Month Low as U.S. Yields Rise

    This article from Bloomberg may be of interest to subscribers. Here it is in full:

    The yuan slipped to its weakest level in six months, pressured by concern surrounding China’s growth outlook and a surge in U.S. Treasury yields.

    China’s offshore currency weakened by as much as 0.7% to 6.4198 per dollar in New York trading, its weakest since October 2021. The decline comes as traders eye the risk that the world’s second-largest economy is becoming snarled in lockdowns, quarantine and testing rules. The yuan was also pressured by a rise in U.S. yields and the greenback on odds of even more aggressive Federal Reserve tightening. 

    On Monday, China’s central bank unveiled nearly two dozen measures and promises intended to boost lending and support industries that have been beaten down by recent Covid lockdowns, including a pledge to guide banks to expand loan extensions.

    “This is the strongest signal yet from Chinese authorities that they are concerned over growth conditions,” said Simon Harvey, head of currency analysis at Monex Europe. “Coupled with regulatory tightening in the tech sector, the increased level of concern over domestic growth suggests a poor year for Chinese equity returns. Today’s currency reaction is reflective of this.”

    Although first-quarter GDP data showed a pick-up in growth, a deceleration in production and retail data in March as economists further worried about China’s growth outlook amid damage from lockdowns. 

    In the U.S., meantime, investors are ramping up bets for the size of the Fed’s next interest rate hike. While markets are generally pricing in a 50-basis-point hike, St. Louis Fed President James Bullard said Monday that hikes of as much as 75 basis points shouldn’t be ruled out. Treasury yields surged across the curve on Tuesday, with the benchmark 30-year bond rising above 3% for the first time in three years.

    That likely deepened losses for the yuan, which on Tuesday breached the key support level of its 200-day moving average. Japan’s yen also plunged, set to extend its longest losing streak in more than half a century.

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    Shein's $100 Billion Value Would Top H&M and Zara Combined

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    A Chinese fast-fashion company without a global network of physical stores of its own is seeking a valuation that could be more than the combined worth of high-street staples Hennes & Mauritz AB and Inditex SA’s Zara.

    Shein, an online-only retailer of inexpensive clothes, beauty and lifestyle products that pumps out over 6,000 new items daily, is in talks with potential investors including General Atlantic for a funding round that could value the company at about $100 billion, Bloomberg News reported Sunday.

    Should Shein succeed with the round, it would make the decade-old brand about twice as valuable as Tokyo-based Fast Retailing Co. -- the owner of Uniqlo -- which last year had more than 2,300 outlets in 25 countries and regions. It would also make Shein the world’s most-valuable startup after ByteDance Ltd. and SpaceX, according to data provider CB Insights.

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    BOJ Steps Into Market to Cap Yields Amid Global Bond Selloff

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    The BOJ’s yield curve control framework aims to cap the 10-year yield, while allowing more flexibility for longer-tenor yields. There’s also talk among traders over whether the BOJ will act to bring down yields for longer-tenor bonds.

    “Focus turns to whether the BOJ will also try to control 20- or 30-year maturities, but it’s likely the bank will tolerate the rise in these super-long yields,” said Mari Iwashita, chief market economist at Daiwa Securities in Tokyo. “By firmly capping 10-year yields, the BOJ can send a signal that it’s keeping an eye on market developments.”

    The 30-year yield matched a six-year high of 0.995% reached last month. 

    The central bank has kept planned purchase amounts for all maturities including super-long bonds steady since July after tweaking operation schedule to quarterly from monthly. It will announce the April-June plan on Thursday.

    The BOJ is expected to continue conducting unlimited fixed-rate bond buying particularly when there is risk of scheduled events of data driving U.S. yields higher after Tokyo session ends, such as U.S. jobs data due on April 1, minutes of FOMC’s March meeting and U.S. CPI.

    “How high Japanese yields will rise depends on U.S. yields and the BOJ will likely automatically seek to cap yields if there are anticipated risks of overseas yields climbing,” Daiwa’s Iwashita said.

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    BOJ's Kuroda Waves the Green Flag for Further Yen Weakness

    This article from Bloomberg may be of interest to subscribers. Here is a section:

    Now that the Bank of Japan has suggested that it isn’t losing sleep over a weaker currency, the yen may gravitate even lower.

    The yen has lost more than 3% against the dollar so far this year despite the war, highlighting how its fundamentals have superseded its haven status. BOJ Governor Haruhiko Kuroda remarked earlier Friday that it is “wrong” to think that a weaker yen is negative for the economy and that the monetary authority doesn’t have a need to run forex policy. With no verbal or actual intervention to stop it, the yen faces little hurdle in weakening further toward 120, consistent with a call MLIV made at the start of the year.

    The BOJ has also reiterated for good measure that inflation reaching 2% -- led by a surge in commodity prices -- is different from its goal of kindling demand and that the current cost-push inflation will in fact weaken the economy. In other words, the BOJ isn’t remotely thinking of changing its policy in the face of what it legitimately sees as temporary factors. That essentially means that real-rate differentials will continue to worsen in favor of the dollar, sending USD/JPY to 120. In fact, colleague Vassilis Karamanis cites technical indicators to suggest that the pair is well set-up to reach the January 2016 high of 121.69.
     

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