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Japan's GDP Miss Builds Case For Snap Election

By Saxo BankBondsNov 17, 2014 02:01AM ET's-gdp-miss-builds-case-for-snap-election-232688
Japan's GDP Miss Builds Case For Snap Election
By Saxo Bank   |  Nov 17, 2014 02:01AM ET
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Credit: US 2.32%, UK 2.11%%, GE 0.78%

US 10 years were slightly wider on the week, while on the old continent, credit tightened considerably as most yields closed the week at their tightest levels. The biggest move was in the UK gilts, on the back of the heavily dovish Bank of England inflation report that saw sterling come off and the expectations of a rate hike being rattled and pushed further back.

In the year to date, it seems like there is a very strong correlation between yields tightening on UK 10 year bonds and the Cable depreciating.

UK 10 year bonds versus Cable:
For sterling to rise, the yield on UK 10 year gilts needs to start widening.


Key closes: US 10yr at 2.32% (2.30%), UK 10yr at 2.11% (2.20%) and Bunds at 0.78% (0.82%).
Equities: S&P 2,039.82 +0.4%. EuroStoxx 3,059.9 -0.2%, DAX 9,253 -0.4%, Nikkei 17,491 +3.6%

Looks like my short eurozone equities is grinding in the right direction (see last week) – albeit I was dead wrong on the credit side of things, yet spot on tactically letting off on being short EURUSD.

My thesis or feeling here is simple, until European Central Bank Mario Draghi fully commits – generally Eurozone equities and credit as a whole should not rally. However I’d rather play that thesis through equities, as the Eurozone credit market has a lot of technical and structural factors that are now embedded in the price action.

It's worth noting that we now have what I believe to be the first bank in Europe – and Germany at that – that is charging negative interest rates on saving accounts. So if you happen to have over EUR 500,000 with Deutsche Skatbank, you will have the privilege of paying them 25 basis points a year for them to hold your money for you.

JPY-related crosses exploded this week. Photo: Thinkstock

While the US was up for the week, with the S&P continuing to chart new territory, it was once again up to Asia (where I reside) to show people how things are done. The Nikkei was up +3.6% for the week, followed by a strong performance in the Hang Seng and Shanghai Composite, up +2.3% and 2.5% respectively.

The main driver in the latter two – Chinese equities in general – was off a final official launch date on the North-South exchange that should be a go today (November 17). The Hang Seng index closed the week above the 24,000 mark, the highest close since a mid September week, yet with c. +20% greater than average volume.

Currencies: JPY 116.29 (114.60), EUR 1.2525 (1.2455), AUD 0.8750 (0.8637), GBP 1.5669 (1.5869)
Volatility exploded last week on JPY-related crosses as USDJPY is sitting at one-year volatility highs, whether you are looking at 1M or 3M ATM options. For the week, the JPY depreciated by -1.45% versus the greenback.

While it seems there is no ceiling on USDJPY, more and more this move is feeling like too far too soon – yet taking the tactical short side, on such a strong structural move that is far from over is tricky.

Against the majors, the greenback only gained ground on the JPY and GBP (dovish inflation report). The Kiwis and Aussie gained remarkable ground rising 2% & 1.3% vs. the USD. The USD basket failed to close above the most recent key level of 88.00, as it finished the week at 87.525 down 13bp for the week.

To say that sterling has lost its legs, would be an understatement, they seem to have been cleanly cut off post the BoE inflation statement, which the market read as excessively dovish. Key FX closes for the week ending November 7: again, a story of USD strengthening.


Hang Seng breaks above 24,000 +2.3% for the week, as the North-South link is set to begin.

Geopolitical risks, conflicts and central bank review
The conflict in Ukraine seems to be re-escalating again, as NATO saw more Russian troops heading across the border into Ukraine. This will be an area to watch this week, especially as Putin supposedly left the G20 early as he was getting picked on by everyone – hmm … real surprise there.

Looking ahead
There are some interesting trades that I’ll be sending out this early this week, I am looking to short NZDUSD – the bounce-back has been too severe and quick, on top of which the Reserve Bank of New Zealand has repeatedly as well as very strongly voiced concern over the need for a weaker NZD.

I would also be looking to short EURGBP, as I believe from a technical, chart and structural perspective this could offer potentially one of the best risk-rewards out there. There will also be some volatility and option-related trades idea pieces that will come out over the next two weeks.

Central Bank upcoming minutes – I’d expect the Reserve Bank of Australia and the Bank of England minutes to be non-events. However, the Federal Open Market Committee minutes could potentially reignite hawkishness on the USD, as I still believe the market has not fully caught up with the constructive and pro-active language of the last FOMC statement.

As before and from a structural perspective, I remain an equity bull (+2100 handle on the S&P by year end), I am a bear on US & UK 10yr and on the currency side, I like trades that are structurally long the USD in one form or another.

Japan: Japanese third-quarter GDP came in at -1.6%a vs. 2.2%e, -7.1%p. We’ve seen the JPY initially move up to 117.05 and then back to 116.33 on the back of this and last on at 116.50 as we add this section into the weekly.

While it is always tricky to see how much is priced in, I think when the digestion of the data points filter in, the interpretation will be the BoJ needs to do EVEN more at some point. I believe it’s almost a given now that we will have a sales tax hike delay, as well as a snap election. The ramifications of the sales tax hike decision can be argued by any bull or bear. From an Economics101 perspective, if one has fragile growth, anything that stems or hinders consumer spending is an absolute no-no. In this perspective, a delay in the sales tax would be very positive, not to mention hugely popular for Prime Minister Shinzo Abe. At the same time, one can argue the piper must get paid, where the fiscal discipline is when you have debt to GDP of a nation close to the 300% levels? And so on. I think we’ll soon hear about Abe calling a snap election to solidify his momentum in the government and see Abe-Kurodanomics through. We could already potentially hear about this tomorrow (sales tax panel meeting today and Abe should be on his way back home from the G20 summit in Australia), yet almost certainly within the next two weeks.

It seems like the opposition is in disarray so Abe’s party may even be able to capture a greater majority than they currently have. Strategically for Abe, delaying the sales tax decision, either in the form of an outright delay or partial delay – will play strongly among voters. So far we continue to hear a delay from October 2015 to April 2017.

A straight sticking to the plan and going forward with the sales tax hike so it comes through in the second half of 2015 would be viewed as very negative by the market in the near-term, then potentially positive (i.e. once again the BoJ would have to do even more) – I think the probability of this proceeding as planned is rather low. I still think Japanese equities have great upside, and that they will be one of the top performers of 2015 (+15-20%, that’s c. 20-21,000 on the NKY, or c. 1,610-1,680 on the Topix), just make sure the yen exposure is hedged as we will be in the 120-130 territory versus the USD in 2015.

I still think the next big structural move in USDJPY will come from the Fed hiking in 2015, that will clearly take us above 120 if we have not ground our way through that by the time of the hike. Key macro data that I am looking at this week*

* (Note dates/times are Hong Kong / Singapore-based)

It's worth noting that China and Australia are due to sign a free trade agreement today, which has been talked about since last week and could be an additional reason we saw tailwinds behind this strengthening versus the USD.

Central banks: It's minutes week, as we have minutes from the FOMC, RBA and BoE – with the latter being somewhat diluted given the inflation report of last week.

BoE governor Mark Carney will actually be giving a speech in Singapore, on Monday, while Draghi will have his quarterly testimony in Brussels.

Asia: Probably the most important global macro data point this week will belong to Japan's third-quarter GDP, which will be out before most markets are open in Asia today (Monday, November 17). The market is expecting +2.2% vs. -7.1% from the previous quarter.

We will also have trade data and the all activity index coming out this week from Japan. China will see October property price figures as well as the HSBC preliminary manufacturing figures on Thursday.

Australia has its conference board as well as RBA currency transactions data. New Zealand has PPI, as well as consumer spending data.

Europe: In the Eurozone we have PMIs, ZEW survey and consumer confidence data. The inflation data and government accounts will be in focus in the UK.

US: Housing, Philly Fed, preliminary PMIs and inflation data are due, on the latter its 1.6%e vs. 1.7%p.

Japan's GDP Miss Builds Case For Snap Election

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Japan's GDP Miss Builds Case For Snap Election

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