Last year it seemed that Japan’s sun was finally rising again. The Yen, seen throughout the world as a safe haven for investors, was one of the most stable and best performing currencies. The optimism with the election of the new government, and in November, Bank of Japan’s 10 trillion yen financial stimulus took the Yen to a 14-year high of 84.82 to the dollar. The political shift signified a positive picture for currency markets because new Finance Minister Hiroshida Fujii was a strong advocate for letting markets decide. This fuelled a rally for the Yen.

WILL POLITICAL CLOUDS DIM THE YEN?
Beginning of 2010, the Japanese government accepted an ailing Fujii’s resignation. Fujii, maintained the principle that government would not intervene to curb the yen’s strength and there need be no fear of export protection. His resignation prompted a jolt in the forex markets and the Yen stopped its rally sending the dollar/yen exchange rate to 92.4.

The appointment of Naoto Kan as new Finance Minister got the response of another drop against the dollar to 93.6. Kan (with less hawkish views than Fujii) vocally and controversially expressed his preference for a weaker Yen as well as intervention. His aim with a weak Yen is to make domestic exports more competitive in the world market. A rebuke by Prime Minister Hatoyama for this statement made Kan back-track his call. However, the currency dropped against the dollar to a four-month low of 93.78. Here is much for us to figure out. We can see undercurrents of a dispute among government officials over currency policy. Then definitely, the export sector is a lot more problematic. And clearly, as of now the government policy itself is unclear!

DEFLATION TALK

Major exporters including Honda Motors complained about the high level of the Yen as they faced poor domestic demand recovery and deflation (prices fell by 2.5% by the end of 2009). In Q4 2009, GDP grew the highest in two years. But not enough for interest rates to rise substantially above 0% or to stimulate consumer spending, which makes about 60 percent of the economy. Well, at least Japan doesn’t have the problem of heavily indebted private households like USA or UK.

Did I speak to soon? Japan’s public debt is projected by the IMF to touch 225% of GDP this year, and 250% in 2014. This is the highest among industrialized nations. In the near future, the new government’s two proposed spending plans and the Y10 trillion stimulus will undermine reigning in public debt. Government may also resort to becoming net seller of JGBs. I see the unsustainable levels as not only an immediate problem. It will expand out to a sovereign debt crisis this year, and add to the risk of a global debt crisis.

SAFETY FIRST

Most of Japan’s problems are in the long term. And pointing toward a possible ‘double-dip recession.’ Despite weak fundamentals, three points convince me of the future. The Japanese people’s savings. Continuing production and exports. And a still cheap and competitive currency.

Coming back to the Yen. Though no longer the lowest-yielding major currency, the Yen continues its safe status on risk-averse investors’ portfolios. This is despite its volatility. The currency is more interesting to see over time. In the chart below, what is prominent is the crucial level of “85” against the dollar. Even about a decade ago the Yen stopped about the 85 mark, similar to Nov 2009.

INTERVENTION YES OR NO ?

The chart is quite interesting. As the world changes all the time one cannot predict the future by looking at prior developments.
No doubt that 85 in USD/JPY means a lot now. Increasing risk reduction the coming months will lead to capital inflow into Japan. Naoto Kan’s comments make me believe there will now be more support for official intervention (last seen in 2004) in determining Yen exchange rates if the currency is set too high. According to Kan this deciding level would be appropriate when at 90 to the dollar. This is a significant political statement.

Naoto Kan will simply be tested, is he around or not with the intervention weapon. I think yes, and the Japanese Ministry of Finance has heavy ammunition. First, they have an unlimited amount of Yen to sell, it’s simply to start the printing machine. Second, they would love to have inflation so they have problems monetary expansion (the excess liquidity will most likely stay in the financial system but Bank of Japan can absorb it through money market instruments – sterilized intervention).
If Naoto Kan takes the fight he will win, so around 85 in USD/JPY it will be time to consider the long-term risk position in JPY.

Just to mention the positive Japanese stocks this morning. The banking sector went up as it seems likely that the tougher capital rules will be delayed. The Japanese banks will probably get 10 years to adopt the new rules. Short term, it of course helps the profitability in the banking sector and give some relief (also the reason for the delay I assume). One of the reasons to tighten the rules was to protect the investor, but to give a 10 years deadline is equal to cancel them. Within the next 10 we will have had another crisis again, but fewer banks than today would then need to care about the new rules. So, no reason to fill up your stock accounts with Japanese banks……

The Dec PMI’s from Europe this morning should keep us occupied for a moment while waiting on US. The market expects the readings to be a touch higher (PMI Manufacturing at 51,4 and service at 53,1). I could see the numbers slightly lower. If they are around the expected I do not see it as positive enough to help stocks today, so I go for a minus until US opens.

US will offer several really interesting data. The last days inflation has gained attention, fair enough, as especially food inflation is jumping (watch India and China). Right now I am not scared about inflation on a global perspective (more on that particularly in the New Year), but the market talks, so I am more alert. The headline inflation in November is expected to be +0,4%, that will be in focus with a clear upside risk due to food, a risk for stocks.

Fundamentally I regard housing starts as the true number to watch, the market expects 575k in November compared to 529k last month. It’s very important to see if the US housing is finding more stability. If so, I might need to adjust my skeptical picture of the world…..A good number will help stocks and vice versa.

Bernanke’s words tonight we will all listen very carefully to, but he will tell us that the world has improved a bit again. He might also hint a rate hike one day, but what else can he do – they are at zero. It’s priced in the market but could give a short term reaction. No doubt that the statement is interesting because this is the main focus in the market this week.

The Dollar has already reacted too much on this. But if we look at the trading volume, then it is low in a December trading that reminds me of the good old days where nobody touched a position if they could avoid it. EUR/USD will trade towards 1,4750 again the coming days.

Peter

I think the quarterly Bank of England report released Wednesday 11^th give some good hints to the market. Particularly when we bear in mind that Bank of England has been very negative. The Bank forecast growth rates of 2.1 per cent for 2010 and 4 per cent for 2011. This is suddenly much higher than the outlook of private sector economists and the Treasury’s forecast.

Bank of England still tells us not to be too excited with the wording from the governor Mr. King “Small movements in quarterly growth rates will not alter the extent of the challenges now facing the economy, such is the scale of the fall in output over the past 18 months,” he said. “We have … only just started along the road to recovery.”

I fully agree that the recovery (where ever we look) will take a long time. Though, I take this as a further sign of a good chance that UK will leave the crisis before the European continent. I continue to like GBP and some UK stocks.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

I apologise for not having updated with comments the last 3 weeks but I had 1½ weeks holiday on 2 very nice hotel. Very unfortunate did the wifi not work. Then Easter arrivved……

The 4 entries from today are:

Currency markets – Back in the risk aversion / appetite game again

Equities – A new recovery shape has been invented – the W shape recovery.

China – The Ox is strong

Central bank rates – What can they do? Print more money…..

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 5 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 5 entries from today are:

Currency markets – Finally reacting on different factors

Equities – Another bull go, backed by the US tax payer – PPIP it’s called this time….

China – Reorganizing the car industry

Hot Topic – EUR/USD – Did Fed start a new EUR/USD trend ?

Central bank rates – They did, quantitative easing from Fed…….

Central bank rates – They did, quantitative easing from Fed…….

US Federal Reserve Bank: Quantitative easing……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut is in April to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Feels like waiting for the next hurricane.

Equities – The bulls are having a party

China – Still joining the bull party

Central bank rates – One cut more from ECB in April and we are there.

Central bank rates – One cut more from ECB in April and we are there.

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Now at 1,00% with a good chance that they cut again. 

European Central Bank: Next cut is in April to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Central bank rates – ECB cuts again in April

US Federal Reserve Bank: Now Fed is at 0 – 0,25%. Next step is intervention in Treasuries. Fuelling money supply……

Bank of England: Another cut last week, now at 0,50% with a good chance that they cut again. These guys are desperate… 

European Central Bank: We got the expected cut and next cut is when spring comes in April – down to 1,00% from the current 1,50%.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – The Greenback is the key again

Equities – Realistic risk conversations would help the market.

China – Wen thinks its ok, or does he?

Central bank rates – they give it another try at ECB……

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Event risks are rising

Equities – It feels heavy……

China – So far the Ox turned out to be a bull.

Central bank rates – The next in line is ECB

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – A bagful of mixed sweets this week.

Equities – Which late night show are you watching ?

China – So far China mainland is upbeat.

Central bank rates – Another cut to save the world this week……

Central bank rates – Another cut to save the world this week ……….

US Federal Reserve Bank: Now Fed is at 0,25% and it’s difficult to go much lower. They claim to have other methods to help the market (or you could read force the market) to get moving. Though it is not very healthy – creating a new credit bubble.

Bank of England: They will drive it as low as possible – another 50 basis points to 1,00% will come this week. Lower than the 315 year low….. 

European Central Bank: Priced in the market is a 2 step move down to 1,50%. Right know it feels like the way. From Mr. Trichets comments it is important to note that ECB won’t cut in February and next time earliest is in March. Some are now talking about 0,50% at year end – it won’t happen……

Bank of Japan: 0,10% – that was it.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Capital flows are gaining in importance again……

Equities – Is the earning season also a hurricane season ?

China – the credit growth in December a true credit growth ?

Central bank rates – Still pointing lower……….

Central bank rates – Still pointing lower……….

US Federal Reserve Bank: Now Fed is at 0,50% and it’s difficult to go much lower. They claim to have other methods to help the market (or you could read force the market) to get moving. Though it is not very healthy – creating a new credit bubble.

Bank of England: They will drive it as low as possible – another 50 basis points to 1,50% last week. The 315 year low….. 

European Central Bank: As expected we got the 50 basis points rate cut from ECB. Priced in the market is a 2 step move down to 1,50%. Right know it feels like the way. From Mr. Trichets comments it is important to note that ECB won’t cut in February and next time earliest is in March.

Bank of Japan: 0,10% – that was it.

Central bank rates – Cutting as much as possible, and then what?

US Federal Reserve Bank: Now Fed is at 0,50% and it’s difficult to go much lower. They claim to have other methods to help the market (or you could read force the market) to get moving. Though it is not very healthy – creating a new credit bubble.

Bank of England: They will drive it as low as possible – another 50 basis points to 1,50% last week. The 315 year low….. 

European Central Bank: Very quickly taken down to 2,50% so now Mr. Weber needs some time to digest. Further cuts are already priced in and also likely, but slowly towards 1,50% or 1,75% during the spring. The next step to 2,00% is on Thursday 15^th Jan.

Bank of Japan: 0,10% – that was it.

Below you will find my weekly view on the very challenging financial markets.

Read more about all the interesting happenings in the financial markets in the 4 entries here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

The 4 entries from today are:

Currency markets – Fundamentals will continue to work……
Equities – 2009 will be a limbo dance – how low can you go?………

China – many hope that the year of the Ox will be better.

Central bank rates – Cutting as much as possible, and then what?

Central bank rates – Cutting as much as possible, and then what?

US Federal Reserve Bank: Now Fed is at 0,50% and it’s difficult to go much lower. They claim to have other methods to help the market (or you could read force the market) to get moving. Though it is not very healthy – creating a new credit bubble.

Bank of England: They will drive it as low as possible – another 50 basis points to 1,50% this week. 

European Central Bank: Very quickly taken down to 2,50% so now Mr. Weber needs some time to digest. Further cuts are already priced in and also likely, but slowly towards 1,50% or 1,75% during the spring.

Bank of Japan: 0,10% – that was it.

Do you remember the good old days?

The time, when a US rescue package worth the giant amount of USD 160 billion, could turn all markets around. Some economists even said that it would save the US economy from recession. Today (or more precise, last weekend) it wouldn’t even be enough to save a leading US bank……….

It leads to the headline from the stock market comment last week. Good news are doable, but the price is high and getting higher – I think that became clear for everybody during last Sunday. During the weekend the amount that the US government has guaranteed exceeded USD 7800 billion (through Fed, direct capital injections, through other channels, etc), the news agency Bloomberg calculated. It represents more than half of the total US GDP in 2007.

Only a few months ago President Bush presented the USD 160 billion package but today that amount would make people laugh. It shows how severe forces we are up against, as it requires bigger and bigger rescue packages to generate good news……..

A significant part of the risk are guarantees from Fed, but I am convinced that parts of the guarantees will be changed into cash obligations (i. e. real public debt).In addition Fed has raised their risk profile as yesterday’s rescue package included a direct credit risk.

One thing is for sure, the US Treasury will need to issue more debt. Also certain is that there will be buyers, but if you believe in the supply and demand curve, then the bet should be, that buyers are only to be found at higher interest rates. The efforts done with the endless number of US rescue packages are good and partly necessary. The price for many years with too low interest rates and excessive borrowing in the private household sector, is higher US T-Bill yields, particularly in the long end.

Japanese life insurance companies today said that they don’t buy US T-Bills at the current prices. China is a natural buyer with their USD 2 trillion large reserves, but China has its own rescue package of USD 600 billion now. Technically a country can not just take money from the currency reserves and spend domestic, but they can issue more debt. In that case a country might be more comfortable with currency reserves consisting of more cash or short dated T-Bills (i.e. avoiding the longer maturities). The Treasury Department should consider to hire some of the fixed income sales people that are around these days…….

I am not worried about, if US will get the debt financed, it’s just a matter of the price. What worries me is when the financial markets start to focus on the problem. Right now are rescue packages taken positive, but even the US President can’t save the world from itself. One day the US budget can’t take more obligations on, but who will decide when we have reached this point? The public opinion in US, the politicians on Capitol Hill or the financial markets?

If the US politicians wait until the financial markets say “enough”, then the obligations probably have become excessive. The US Treasury then truly has translated a short to mid term problem into a long term painful problem. We are not there yet, but………..

By the way, the (+1) 202 622 2000 phone number is to the switch board at U. S. Department of the Treasury.

Below you will find my weekly view on the very challenging financial markets. In my view it is still too early to enter anywhere with the strategic investments apart from oil – please read the Hot Topic below this entry. The China update every week is worth to read as China will overcome……

Read more about all the interesting happenings in the financial markets in the outlook here below. I hope you find it interesting to read my private view about the consequences for the stock markets, currencies, China and what to expect from the central banks.

Currency markets – Capital flows are still making the lead.

EUR/USD (1,2710): Last week I thought it was time to focus on fundamentals. It turned out to be wrong and we are back in the situation where other currency pairs and equities decide EUR/USD movements. It’s difficult to say what economy looks worst but I keep my opinion that US is in the steepest downturn, leading to a rebound in EUR/USD one day. EUR/USD is nicely trading in the 1,2500 – 1,3000 range but a 1,2400 – 1,2900 is the one for this week.
The range trading in EUR/USD is a sign that the isolated EUR/JPY selling has stopped. We need to watch out for new lows in European equities. At that level further long European equities / short Yen could be closed.
The most interesting fundamentals this week are out of US, but they are not that serious as all eyes are on growth numbers. The US housing starts on Wednesday (expected 780k) I watch and then Philly Fed on Thursday (expected -35,0).
As I had the expectation of fundamentals returning as the key driver in FX I raised my target. I need to put it back to the range followed by 1,3250

Target: Range 1,2400 – 1,2500 followed by 1,3250.  

EUR/GBP (0,8460) – GBP (1,5020): 1½ weeks ago Bank of England surprised with 150 basis points. Last week they chocked the market with one of the most bearish central bank outlook I have seen for a long time. I thought all negative news was priced in but that was certainly not the case.

Regarding Sterling it’s more fundamentals deciding the trend compared to other currencies. Growth outlook is in focus but also public borrowing gets attention now. The political and central bank comments mean more than economic data. That’s what I keep an eye on this week.

The only good thing about the recommendation last week was the stop loss at 1,5420. The target was of course totally wrong. The economic situation in UK is gloomy, also more than in rest of Europe. Sterling will remain under pressure after the last Bank of England report. Depending on news about public finance I have the feeling that GBP will rebound a bit, and then we need to see what happens.

Targets: EUR/GBP 0,8250 – GBP/USD 1,6500 / stop loss 1,5200.

EUR/JPY (123,35) – USD/JPY (97,05): Good swings in JPY is still the case but as mentioned under EUR/USD it’s not limited to EUR/JPY anymore. Capital moves towards Japan sent EUR/JPY to the target of 118,50 last week, though also partly caused by EUR/USD trading lower instead of higher.

All economic data from any country is negative but I need to mention the Japanese GDP numbers. Not only was July – September negative but the April – June was revised further down. Some recessions have been technical recessions with 0,1 or 0,2% negative growth in 2 quarters. This time the numbers are very different – unfortunately.

If fundamentals decided the JPY trend, Yen would be much lower but the capital flows is the name of the game. Watch the stock market comments, it’s where the clues are. I keep the targets.

   
Targets: EUR/JPY 118,50 – USD/JPY 90,00.

Equities – Any good news left ? Certainly, the price for the last one was $700 bio, how much next ?

Nikkei 225 (8.523)  Topix (850)  Dax (4.616)  FTSE 100 (4.174) Dow Jones (8.497)  S&P 500 (873) Nasdaq Comp (1.517)  

Let’s start wit G20. G7 never really agreed on something apart from where to meet next time. Should it be easier when 20 countries needs to agree who should suffer the most (remember we are in a downturn – it’s not growth we are sharing) – to be honest I doubt it (please also read the China part).
They agreed to control the financial sector more. It might be correct to do so, but it doesn’t bring any growth right now. On the contrary will banks be more reluctant to do anything at all, including lending money out.
The coordinated fiscal driven global growth plan was postponed is my feeling. Or each country goes back home to support the domestic economy.
It’s ok that equity markets react negative as it underlines how serious the situation is. The politicians have realised how badly the global economy is looking and the markets can smell it.

As mentioned several times, is what we go through now the consequence of a credit bobble that busted. The asset markets are repricing, it’s very painful, but not a punishment of anybody. It feels like a punishment and those with high debt ratio’s are feeling this in particular.

If we believe in repricing of assets, there will be an overshooting on the downside, meaning cheap assets can be bought at a certain time. The golden question is, if one should buy at -25% or -90%? Too early to say, I can just repeat, don’t buy yet.

I feel it’s a bit overdone to mention any macro news from last week as they were all between very bad and awful.
No wonder that the G20 people are unhappy about the situation. They can’t avoid the recession, but should focus on avoiding the depression.
It seems sensible to use fiscal policy to fight the depression, but the good news cost a lot of money now. My best guess is that financial institutions will require more money. The automobile and automotive sector is the next to be rescued – how much do you want to pay? The rescue till come but not jobs will be saved, meaning more unemployed but not so many that we enter a depression.

Apart from the Chinese stocks (please read below) I still watch one thing in the Japanese market. Last week I wrote about the Japanese GPIF fund might buy stocks short term. Naturally it’s hard to get precise information, but during several sessions the Japanese morning is fairly negative but then the market turns back to almost positive territory followed by another sell off. A trading pattern that indicates a big player is in the market.

In US we actually reached the 820 in S&P 500 last week followed by an enormous rebound. I don’t regard the target as reached in the way that there is any need to change it. The rebound indicates that 820 in S&P 500 is a very interesting level (don’t buy even if we touch).
It also confirms that we enter a life where people buy shares for different reason. Long term technical support, emotional reasons like it feels cheap, or it’s a well known must have company. Different factors that aren’t based on rational thinking. Within the last days I have spoken with several private investors, who simply are happy to buy now – one day it will take over…..

In absence of true important macro economic figures this week, the markets will be dominated by the underlying macro gloomy outlook. Now and then with emotional or technical caused buying.
Just a few earning reports from US this week, Home Depot Inc. on Tuesday and Dell, Inc. is out Thursday.
 

Targets: Nikkei 225 6.683  Topix 697  DAX 3.906  FTSE 100 3.456  Dow Jones (7730)  S&P 500 (820)  Nasdaq Comp (1489)

China – Mainland stocks should have gone down but they went up……

Hang Seng (13.529)  Shanghai B (110)  USD/CNY (6,8235)

As discussed last week, the Chinese stimulus package was good news if the headlines were the truth. As mentioned, some economists took the news cautious and they were right to do so. Ahead of the weekend (but late enough so the G20 participants learned about it after the summit), it became clear that the stimulus package in reality is ¼ of the promised amounts. The rest (after all 75%) is planed to come from commercial banks, regions and other sources, but very unfortunate it is less realistic.

The Communist Party was very smart to let the stimulus package news overshadow the partly very bad news during last week. Fair, the Chinese equity market was buoyant, but maybe strange that it continued this morning, despite the adjusted details about the stimulus package.
 
There are rumours about a large government backed stabilisation fund in the size of RMB 600 – 800 billion aimed to support the domestic A shares.
As usual is nothing really confirmed but it sounds very possible. This was another key to the 17% rebound in A shares last week (B shares went 8% up).
At what level the fund gets active (if at all) is the current speculation, but some point at 1500 in Shanghai A as very important. That’s 30% down from today’s close, but when the plan was thought out the index was trading at 1800.

Last week I mentioned that some funds might be running short positions in Chinese B shares. If some are closed out I can’t say, but it of course fuels the upside.

I keep the targets for Hang Seng and Shanghai B. The reason is as mentioned several times earlier that I regard the globally bearish markets as the biggest danger to Chinese stocks. China will feel the global crisis even more, but the government is of all governments, the most active in supporting the domestic demand.

This leads to a line on USD/CNY. People’s Bank of China’s Zhou Xiaochuan hinted that China might let their currency depreciate. China also announced more export rebates (another word for subsidies) so they just need to restrict import, then they are running a full blown protection policy. All announced the days around the G20 summit – it look’s difficult for G20.    

Targets: Hang Seng 11.000     Shanghai B 90

Central bank rates

US Federal Reserve Bank: Now Fed is at 1,00%. They might cut again, but going below 0,50% is very difficult as money market funds will create a negative return. This would create too big problems is my view.

Bank of England: Now at 3,00% and they will take the base rate lower is they find it necessary.  

European Central Bank: Further cuts are already priced in. Some ECB members signalised another 50 is possible, and it seems to happen before Christmas.

Bank of Japan: 0,30% and they might even cut again, but of course it won’t change anything.

I am looking forward to your comments and wish everybody a profitable week.

Peter