The relief rally rolls on in Asia as markets begin to test new levels of resistance. The ASX hasn’t managed a close above 5000 since 7 January, and while the rally has been very strong, it doesn’t look like we will quite make the 5000 level today. Markets have rallied on hints of further easing by the ECB and speculation that the BOJ will follow suit. But there has been no major change in fundamentals to support the rally, and the concern is if and when it fizzles out, markets could even drop below their recent lows. These concerns are likely holding back a lot of “bottom-pickers”. The rally in oil has the least fundamental support, and the huge bounce we’ve seen in prices could well be reversed by another EIA oil inventories miss this week.
Kuroda’s interview at Davos on Friday seems to have provided more consternation than clarity with regards to any easing by the BOJ at their meeting this week. While the yen has gained 1.7% since the ECB excited market speculation about monetary easing, it has shown little inclination to weaken much further today. 119 for the USD/JPY is looking like an important resistance level as the market weighs the actual likelihood of a move by the BOJ.
Japanese trade data today has only further showed the growing pressures of a stronger yen. Japanese exports and imports both declined more than the market expected, but the difference between the two held steady, seeing a further rise in Japan’s trade balance. Japan posted the second positive trade balance in a row in seasonally adjusted terms, the first time it has done so since 2011, which points to some successes of the Abenomics program.
But much of this shrinking of the trade deficit has been driven by the weaker yen. And since July 2015 there has been a noticeable turnaround in USD-denominated Japanese imports and exports, which shows the strength that has been seen in the yen since global markets sold off in August last year. After the yen touched 115 for the first time in a year last week, the strength in the yen alone could make the case for further easing by the BOJ. And, noticeably, when one looks at the biggest movers in the Nikkei 225 over the past week, the list is dominated by exporters that would benefit from a weaker yen, such as Asahi Glass Co., Ltd. (T:5201), Japan Tobacco Inc (T:2914) and Daiichi Sankyo Co., Ltd. (T:4568).
Market pricing for a rate cut by the RBA has stepped up dramatically in 2016, with the market giving a 65% probability that we will see a rate cut by June. There was a worrying drop off in the NAB Business Conditions index for December (prior to the January selloff), which declined to its lowest level since April. Housing-related components were the biggest culprits for the weakness, which is consistent with the massive decline in HIA new home sales in November.
It’s difficult to know how long this little resurgence in risk appetite will last. China is about to go offline for Chinese New Year beginning 8 February; this could remove the destabilising force of the Chinese equity markets for a while. But China’s Q1 data is set to be very weak, and, when this starts filtering out in March and April, that could really turn global sentiment (and oil) as soon as the data hits. Historically, markets are still trading at relatively elevated levels according to Shiller’s CAPE, with the S&P 500 still trading higher than one standard deviation above the long-term average.
A lot of press leaks and announcements over the weekend really made clear the predicament China finds itself in at the moment. Chinese banks’ calls for an RRR cut were denied by the PBOC over further devaluation fears while investigations into those trying to circumvent China’s FX controls look to be tightened further. There is already evidence of FX leaking out again through misreporting import and export numbers, and this will be a key channel to focus on going forward.
ASX: The ASX has had a very strong day, with banking stocks finally attracting buyers in big numbers. All the five major banks gained 2-3% on the day. It’s hard to fault investors wanting to get back into banking stocks at this point after they’ve lost so much in value this year. Even if the banks lose another 10% over the coming months but regain that 10% by the end of the year, an investor still makes the 4-5% yield. That is, of course, contingent on China and housing market concerns not hurting dividend payouts.
Despite a strong performance, the ASX has be unwilling to break through resistance at the 5000 level for today at least. Moves in the underlying oil price seem to be behind the massive rally in the energy sector today, although much of the materials sector was noticeably left out of today’s rally, with BHP Billiton Ltd (AX:BHP), Rio Tinto Ltd (AX:RIO) and Fortescue Metals Group Ltd (AX:FMG) all staying in the red.