Wall Street posts three-week losing streak as Iran war batters sentiment
In a blog last week titled Japan Is Normalizing: Risks To The Yen Carry Trade, we discussed Japan’s path to economic normalization and how it might affect a great source of global liquidity, the yen carry trade. A week after publishing the article, Japan had a stunning election.
As a result, its new Prime Minister, Sanae Takaichi, now controls both the ruling party and the legislative agenda with a supermajority. Her unexpected win and decisive control of its legislature will remove the political gridlock and indecisiveness that have plagued Japan.
The country now has a single decision-maker with both the authority and time to implement policy. Given that Japanese policies have a significant impact on the yen carry trade and global liquidity, Sanae Takaichi’s actions will have consequences well beyond Japan.
The Nikkei jumped by more than 5% on the election, while its bond yields rose, as shown below. The market is betting that Sanae Takaichi will follow through on her campaign promises of aggressive fiscal stimulus, including reductions in the consumption tax. Sanae Takaichi also promised strategic investments in technology and infrastructure to boost Japan’s global competitiveness, reduce inflation, and raise wages. While her proposals are stock market-friendly, they risk further destabilizing its bond market and the yen. However, there are rumors that she may sell Japanese assets to help fund her fiscal spending plans, thereby not placing the onus for stimulus on the bond market.
It is worth noting that the Prime Minister has much greater influence over the Bank of Japan (BOJ) than the US government has on the Fed. Accordingly, Sanae Takaichi may prompt the BOJ to resume its aggressive actions to stabilize both the yen and yields. Doing so will lessen any impact of changes in Japan’s fiscal policies on the yen carry trade. Stay tuned!
Utilities Stocks: Waiting On Yield Trend?
Over the last three months, we have seen a strong rotation from technology and communications toward more economically sensitive sectors, such as industrials, materials, and transportation. Moreover, value stocks have well outperformed growth stocks.
However, while the rotation has included almost all of the sectors, the utilities sector has largely been left out. As the graphic below shows, utilities are currently at fair value on our relative analysis basis. Further, the graph on the right side shows the sector has been rotating between oversold (bottom left) and fair value (middle).
This raises the question of what might make utilities outperform on both relative and absolute bases. The answer may likely sit with bond yields. Recently, bond yields have been very stable. Even with good or bad news, the change in yields has been minimal. It might just be that utilities are waiting for a trend in yields to develop. Might the plummeting Truflation data shown in the second graphic precipitate a change?
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