Japan: CGPI index in April: +0.9% m/m

FOREX NEWS: As it became known on Wednesday, CGPI index in Japan rose by 0.9% m/m in April against the growth by 0.6% m/m in March.
 
 

Source: Liteforex.org rss feed

Japan: Net orders in the machine building sector in March: +2.9% m/m

FOREX NEWS: According to the data released at the beginning of the week, net orders in the machine building sector in Japan increased by 2.9% m/m in March against the revised level of-1.9% m/m in February.
 

Source: Liteforex.org rss feed

Japan: Consumer confidence decreased to 33.1 points in April

FOREX NEWS: As it became known this morning, level of consumer confidence in Japan decreased to 33.1 points in April against the previous level of 38.6 points.
 
 

Source: Liteforex.org rss feed

Massive Earthquake Shakes Japan; Markets Shaken by Eurozone Debt

The 8.9 magnitude earthquake in Japan has added to the other worries of speculators these days to exacerbate the correctionary forces already in place, and risky assets were sold today all around the world as even Japanese goverment bonds managed to appreciate in a quick flight to safety. To be sure, the cost of rebuilding and stimulating the economy after the earthquake will plunge Japan  deeper into the red, as it struggles with a budget deficit and a public debt that is monstrous even by the standards of our extraordinary times. Yet the buyers of Japanese bonds seem to believe that if the worst comes to pass, it is still better to have a guarantee that you can get your principal back, which explains the popularity of government debt in the midst of great concern about the viability of public finances and inflation risks.

We are equally surprised to learn from a report in Bloomberg that PIMCO is going to be starting a derivative-lite version of its main fund controlling $230 billion in assets. The new fund will use less leverage, purchase less high yield paper and generally avoid the more exotic forms of risk that have been favored by the financial market over the past decade. It is a sign of the changes that the finance world is going through, and the shift in mentality towards greater conservatism in all fields, that the world`s most successful bond fund which has beaten "98% of competitors over the past 24 years" is now averse to risk plays that have made it such a success and a popular name in its field.

In Libya, the Colonel`s mercenaries and regular Libyan armed forces units are reported to have regained control of some of the oil producing regions near the town of Sirta, where clashes were taking place in the past days, with Western leaders moving slowly towards more drastic action against the dictatorship in spite of a lack of leadership. Today, France went so far as to recognize the opposition movement`s leadership as the legitimate representative of the country, and while others have so far not taken this step, it should not be long before whatever remains of the regimes legitimacy is destroyed by the Colonel`s erratic and arbitrary decisions.

Nobody should be surprised that sovereign debt issues in the Eurozone are resurfacing in this highly pessimistic environment, and we note the rise in the yield of Portuguese debt as the country`s finance minister warns of the need to understand the consequences of the crisis. We don`t think that the minister was saying anything extreme, but the market, in its usual habit, is waking up to all the risks and dangers at the same time, and lumping junk European debt with all the rubbish out there at a time of  great tension.

In short, today is proving to be an active day with lots of gloom in the air, and we can only expect it to get worse before it gets better, especially as the true scope of Chinese tightening, Middle East Revolution, and the Eurozone crisis remain inadequately understood. 

Japan Rallies while Western Markets fall on Sovereign Debt

The Americans and their allies were moving to reduce the intensity of  air strikes in Libya now that the Colonel`s defenses have been mauled, and optimism with respect to Japan`s fortunes in dealing with the nuclear crisis was improving as well, but ironically markets have reacted to the news with sales today. Technical analysis experts, including Laszlo Birinyi, were predicting a fall of around 10% for the entire correction, but even if that were to happen, it will still be a brief reversal in what is essentially an central bank inflated global asset market.

Today`s sales were attributed to the 90-odd bps rise in Irish 2-yr yields, and since Asian markets were doing reasonably well with Japan in a bullish mood after yesterday`s holiday, this explanation seems to make sense. And if we consider how resilient the market has been to what could have been a period of severe pummeling, after a number of massive negative surprises, a little bit of selling should come as no surprise. We believe that stock and commodity markets will continue to remain in a bullish trend for as long as the Fed maintains its easing bias. As such, while the oil shock and the Japanese earthquake are powerful enough to derail any trend in the short-term, the printing press will rule in the longer term.

The main question is whether the Fed will be inclined to raise interest rates at any point as a consequence of the events that we are focusing on at the moment, in part due to emotional reasons. There is little sign that the bank will see the recent fluctuations as an indication of a shift in long-term, multi-year inflation expectations, on the notion that the Libya War as well as the Japanese Earthquake are all one-time events that will not have lasting influence on pricing power or consumption trends. To reinforce this viewpoint, we have some signs that the Japanese people will be even more conservative in their spending habits - a phenomenon that might at best be compensated for by increased government expenditure. Only a sustained bull market in the country would challenge this analysis, but Japan has no grounds to fuel such a trend, outside of the external dynamics generated by global economic growth. It therefore makes sense to expect both the BoJ and the Fed to maintain their present postures.

It is clear that the Asian and Western markets cannot remain decoupled from each other for a long period of time, and if the concerns about Europe intensify there is a good chance that we could see the weakness spread around the world to last till the end of this week. But given how big the incentive is for Europe to avert a breakdown of the E.U., after so much money spent and committed in the past year alone, we believe that the first half of 2011 will be a bullish phase, overall, for the world of finance.

ElBaradei Returns to Egypt; S&P Downgrades Japan

Protests in the Arab World continue, and with every passing day, the power grip of the dictators seems weaker, with strong implication for regional geopolitics and the global economy . Today`s main event in the finance world is the downgrade of Japan`s credit rating by S&P.

After nine years of lull, S&P has downgraded Japan to AA-, with a negative outlook, on the grounds that the Japanese government doesn`t have a coherent plan to manage the high risk posed by the mountain of debt that Japan has accumulated over the past 20 years while trying to pursue a similar strategy to that recently espoused by Ben Bernanke in the U.S. Enormous sums have been spent in order to restart the Japanese economy through public spending, but it has not been enough to reverse the mood of the Japanese public, and they have become as pessimistic nowadays as they were optimistic in the years before 1990, when the economy was charging ahead. 

We, like many others, are of the opinion that the  Japanese have their heads in the sand and don`t know what they are doing. Apart from the complete lack of credible political leadership in the country to address immediate issues such as those that exist between Japan and China, or the necessary economic reforms that could help rebalance the bankrupt domestic version of the Asian model, Japan is also clueless with respect to the long-term challenges that it faces over the next decades. A meaningful rise in interest rates would quickly constrain the hands of the Japanese government, leading to  unpredictable results for the country, and of course for the world.

Still, we don`t expect to see the Japanese trigger an Asia wide crisis, although we do not completely disregard the possibility of such a development. The Japanese economy has been running on external dynamics for a long time now, and no one follows trends in the country as a potential indicator for regional or worldwide events. Japan has been living with a liqudity trap, with a stagnant domestic market, and deflation for a long time, but nobody is too worried about any of these otherwise menacing details while purchasing Japanese debt. S&P downgrade is significant in that sense, but as long as the rest of the world is able to recycle JPY to some higher yielding asset somewhere, create growth, and thereby, demand for Japanese products, we believe that the Japanese economy will keep teetering on the edge, threatening to, but never actually collapsing for some time. 

In short, Japan`s performance is tied to factors that are outside of the country`s control, and the most important variable in this context is China. While it is often thought that Chinese competition is detrimental to Japanese performance, any handicap to Japan caused by China`s competitiveness is easily compensated for by the global dynamism that is brought about by Chinese consumption, trade, and investment.  The Japanese know this better than we do, and that is why, arguably, they are always dovish on any confrontation with the Chinese communists, apart from any moral and historical reasons that they may have.

In other events, we were surprised to see in an article on Bloomberg today that our pessimistic opinion on China is not as isolated as it would seem on the basis of the frequency of opinions and articles with a similar bent on news sources. 82% of participants in a global poll organized by the financial news provider have indicated that they expect a financial crisis in China after 2016, with about 42% expecting the crisis to hit within the next five years. Only 7% were so audacious and bullish on the country to say that such a thing would never happen. 53% of global respondents regard the Chinese economy as a bubble, and the concern is even higher among the country`s Asian partners where the proposition that China is a bubble finds approval by 60% of respondents. By contrast very few investors seem to expect a political crisis in the country, with only 27% expecting such an event in the next 2-5 years. We think that this risk is being underestimated, as frustration with the CCP is only hidden by economic strength if the country, and it is but a matter of time before disapproving voices are raised, if the feel-good sentiment of the moment is lost.

Today stocks are weaker, gold and oil are lower, while the USD doesn`t seem to benefit a lot from this situation. We`ll keep you updated with Chinese and Asian issues, as we expect the region to generate the most exciting news for the coming decade.