Japanese economy weak
In its hardest contraction since June 2014, Japan’s economy is facing its second drop since the beginning of the year. Largest contributors to the drop are: the trade war between Washington and Beijing; Typhoon Trami that disrupted production and distribution channels; and a 6.7 earthquake that hit the Northern Island Hokkaido. Given an outlook of a 2.50% decline, Japan’s GDP is worrisome, as Japanese domestic demand dropped 2.20%. Meanwhile, Japan’s current account balance has declined in October, given at 1.3 trillion yen ($ 11.6 billion) and 28% lower than September. The trade deficit has been widened 321.7 billion yen ($ -2.8 billion), the most in 5 months.
In the context of a slowdown in global growth and an ongoing trade war, a Q4 rebound is questionable. Policymakers hope capital expenditures will help the economy rebound, but this has yet to be seen. USD/JPY is currently trading at 112.70 (+0.06% year-to-date), heading higher as safe haven demand builds, approaching 112.80 short-term.
Unhappy Monday
Lots of red in equity markets at the start of the week. Following America’s weak payroll and wage data for November (following weak German GDP and export data), markets have ramped concern over slowing global growth. OPEC’s and Russia’s oil production cuts had limited effect: worry is about demand. Despite fears of inverse yields, US treasury prices dropped. History indicates that two of the last three recession coincided with Fed hiking and inverse yields. A rally in oil prices would give inflation bulls hope that flattening/inverting yields could reverse. Yet real fears that USA’s continued tensions with China – especially following arrest of a top Huawei executive – could trigger Chinese reprisals. Graphic images of French riots reinforce pessimism. Finally, massive event risk is embedded in the Brexit drama, as the UK parliament’s vote is set for tomorrow. Consensus is the Chequers’ plan will be rejected, sending negotiations into absolute chaos.
We are seeing a build-up in long GBP as markets anticipate the least disruptive path toward Brexit. We suggest traders move carefully in GBP ahead of critical vote. Despite the growing weight on equity prices, we suspect a quick fix is possible. A potential US slowdown and volatility in stocks has triggered thinking that hawkish Fed path could be in jeopardy. Further statements regarding policy limits or a dovish Fed December meeting would do wonders for investor sentiment.
