The US equity market rolls on, and if you are a equity money manager and not making money at present, you probably never will. The moves seen in stocks highlight the power behind the bull market, and while bad news is soon forgotten, good news provides another opportunity to buy.
Perhaps the raft of data in upcoming trade could be the next catalst, with CPI, Philly Fed, housing starts and building permits to be released. The CPI print will be closely watched, although it’s worth bearing in mind the Fed’s prefered measure is core PCE (personal consumption expenditure), which was recently announced at 1.2% in Q1. The headline print is expected to show inflation running at 1.8%, while the less volatile ex-food measure is anticipated to grow at 1.3%. Given yesterday’s buying in treasuries, a weak number could see that momentum continue.
There seems to be a growing concern about how Japan’s ultra-easy policy could impact Fed policy over the longer term, and if the JPY continues to weaken it really could have positive implications on the USD. News today that Fujitsu is raising the price of personal computers given the increased input costs (due to falling JPY) will either mean it exports these products to the US at the same price and therefore takes a hit to margins, or push the increase on the US consumer. Thus, the US will be importing inflation. Perhaps the Fed will get a hand from the BoJ’s measures.
Japan has come under pressure as Mitsubishi UFJ and Sumitomo Mitsui Financial Group cut guidance, and the index looks set to print a bearish outside day at the trend highs. After a 78% rally from the October lows, there was always going to be a point when profit taking came into the market. It’s been an amazing run, with the biggest pullback to the 6.7% retracement we saw in March. The bulls will look to buy dips and the key level there is 14,575 (the 38.2% retracement of the recent 13,637 to 15,155 move), which would also represent a 3.8% pullback. Interestingly this pullback has come amidst a very strong Q1 GDP print, which came out at 3.5%, relative to expectations of 2.7%. What’s more, consumer spending contributed a sizeable 2.3 percentage points of the real GDP number, and at annualised growth of 3.7%, marked the strongest growth (in consumer spending) since the April to June 2011 quarter.
This is not the first piece of strong data of late, and while Japan is coming off a lower base, its growth rate is now at least one percentage point better than any other G10 nation. On another positive note, Japanese firms continue to buy foreign bonds with a total of ¥186.4 billion reported for the week. Reports (source Nikkei) that the biggest five banks had reduced their combined holdings in JGBs by 3.7% year-to-date in anticipation of rising rates has been widely discussed, and this seems to be the opposite from the life insurance firms who are not wanting to take on significant currency risk.
Interestingly, the rest of Asia didn’t follow, with the CSI index in China up 2.0%, while the Shanghai Composite has gained 2.2%.
The ASX 200 looks pretty uninspiring on an index basis, and once again it was yield/defensive names that have kept the market in positive territory. Gold plays have been chopped up and short interest is still pretty low. We see no reason to hold these plays right now and would prefer stocks that are leveraged to a better underlying thematic (we are longer-term gold bears), not to mention the numbers who have had production issues in recent times. Newcrest has now lost 65% of its market capitalisation from the 2010 highs and looks like it wants to go potentially go to $12.50 (the 2003 to 2004 highs). As things stand, analysts still love the name, with 60% of those covering holding a buy/outperform rating.
AUD/USD continues to look heavy above 0.9900, although it managed to close above key support at 0.9870. There is some chatter on the floors about sovereigns looking at Aussie government bonds again, which could see the AUD supported.
European markets are not reacting too much to the weak Japanese markets, presumably helped by strength in China. US futures are down a touch, but client business has been mixed and hardly thematic of a sell-off on the open. US data will get the attention, but we also have European CPI and trade balance figures from the eurozone (as a region) and Italy. Fed speeches will come from Charles Plosser, Eric Rosengren, Richard Fisher and John Williams.
USD/CHF seems to be getting quite a bit of attention on the floors as a much more compelling way to play short EUR/USD. The pair looks nicely supported and after breaking the longer-term downtrend at 0.9590 it could squeeze up to July 2012 highs of 0.9972 in the coming weeks. We feel buying dips to 0.9600, with a stop at 0.9510 could be what traders are looking at.
(weekly chart of USD/CHF)
CHRIS WESTON
Chief Market Strategist