In sum, even normally market moving events like US monthly jobs and Q4 2012 earnings continue to be drowned out by headlines related to the latest new stimulus or austerity related headlines, whether they originate from Tokyo, Washington, or Brussels.
SUMMARY: Still All About Stimulus
Early week profit taking shows risk asset markets vulnerable at decade highs - yet they keep moving higher as low returns from cash and unlimited stimulus or anticipation of it from US, EU, Japan keeps cash trickling back into risk assets. Indeed except for China's big GDP beat, the big market moving headlines were all about prospects for some form of additional stimulus.
- Asia: Headlines influencing anticipation of Japan stimulus drives Japan, much of Asia all week.
- US: Similarly, the biggest market moving news in the US concerns progress or lack of it on the US debt ceiling
- Europe: Continued optimism, or complacency (depending on your view) on the still dysfunctional EU, aided by positive Spain bond sale (again funded with Spain pension fund money?), helps maintain the drift higher for risk assets and even the EUR. Even SocGen's perma-bear Albert Edwards says European stocks are cheap. The basis for the complacency about the EU crisis behind this remark is the continued faith in the ECB's OMT program to prevent another solvency crisis maintains calm and falling Spanish bond rates.
See below for a breakdown of the daily top market movers and lessons for the coming week and beyond.
- Good China data last Friday. Note however that there was some skepticism on its great export figures, as a number of banks said the report doesn't match up with the weaker figures of its trading partners. China's economic figures have long dogged by accusations of outright falsification in the absence adequate oversight.
- Comments from the chairman of the China Securities Regulatory Commission that it could increase quotas for foreign investment in its capital markets 9-10 times. That move could potentially mean a huge increase in demand for Chinese shares from foreign long term investors like pension funds, and so sent the Shanghai index up over 3%.
- Hopes for Japan, US Money Printing: Ongoing anticipation of more Japan stimulus and Yen printing, as well comments from dovish Fed Governor Charles Evans in a Hong Kong speech supporting more easing and USD printing
- Europe and the US were mixed, with markets essentially flat with slight moves up or down on uncertainty about earnings and a late afternoon Bernanke speech, in which he expressed the same cautious optimism that signals no coming change in Fed policy.
Asia finished mixed, with gains in Japan trimmed by comments from its economic minister that the Yen had fallen enough, thus dampening hopes for more JPY debasement and easing from the BOJ meeting next week.
Again both European and US indexes were mixed on pressure from
- Uncertainty about coming big name earnings reports Wednesday
- Weaker than expected German 2012 GDP
- Further losses for Apple on concerns about week iphone 5 demand
The lackluster results came despite good retail sales and inflation data, because there was nothing in these reports to suggest any change in the Fed's current economic outlook of modest growth and minimal inflation.
Asia was mixed-to-lower, with both Japan and Hong Kong down hard. Contributing to the drop were Japanese comments that the Yen was oversold, which caused it to rally, and that in turn pressured export-dependent Japanese stocks.
Europe was overall mixed-to-lower on profit taking driven modest pullback not linked to any specific news, although we suspect there was at least some follow through from the Asian weakness earlier in the day.
The major US indexes was again flat-to-slightly lower overall despite strong earnings from key banking sector leaders GS and JPM.
Official comments, about both the JPY being too weak, the EUR being too strong, caused both currencies to reverse. There are two reasons for this:
- As with any extended trend and trade that has become overcrowded, the JPY downtrend and EUR uptrend have become vulnerable to any official comments that contradict these trends.
- Both trends are largely driven by market expectations about government manipulation of these currencies, so any hint of a policy change directly undermines the current trends for the JPY and EUR.
Asia was mixed, essentially flat though Shanghai dropped over 1% on some profit taking while the Nikkei recovered after Japan's economic minister backtracked on his earlier comments against Yen weakness. However the USDJPY continued to fall.
European and US indexes closed firmly higher on a combination of
- A solid Spain bond auction
- Talk of new Japan stimulus
- Better than expected US housing starts and first time jobless claims reports
- Rumors of debt ceiling progress (amazing that anyone believes we'll see progress this early on)
Asian risk asset markets were virtually all strongly higher on a combination of factors, including:
- Follow up from Thursday's strong performance in the US and Europe
- China's GDP beat, easing hard landing fears. Both Hong Kong and Shanghai up well over 1%. This was arguably the only market moving news all week that wasn't directly connected to feeding hopes for more money printing.
- Reports that Japan's Finance ministry (the equivalent of the US Treasury Department) and Bank of Japan are discussing cooperation on policy, violating the customary separation powers in which the Finance Ministry controls spending (fiscal policy) and central bank controls money supply. The heightened cooperation suggests more easing and monetizing of debt, aka borrowing funded by money printing. That is good for stocks and other risk assets in the short run because it lowers sovereign and banking system solvency risks, so markets loved the news, and the Nikkei was up nearly 3%. Markets ignored the longer term risks of such policies, discussed below.
Europe was modestly lower on disappointing UK and US data, with losses limited due to good news in Asia noted above as well near term technical support.
The US was overall up a bit after a move higher in the final hours after House Republican leaders backed a three-month extension of the federal debt limit. That helped stocks overcome poor UoM consumer sentiment data, which had kept markets lower despite the good news from Asia and some good earnings news from bellwether global industrial giant GE.
Friday's market action in the US was again a typical case of how stimulus (or deferred austerity) related headlines are overpowering all else.
CONCLUSIONS & LESSONS FOR COMING WEEK
In one form or another, markets continue to move higher with news suggesting more stimulus, debt, and money printing, and lower on the opposite.
- In Asia, the big story concerns anticipated easing in Japan, as well as positive data from China that eases concerns about a hard landing
- In Europe, the assumption of unlimited GIIPS bond buying under the ECB's OMT program is keeping things calm. The big question is why markets assume negotiations over conditions for that aid will proceed quickly enough when needed.
- In the US, the big market moving news was Republican willingness to extend the debt ceiling in exchange for spending cuts.
Indeed, focus on the above has managed to drown out such normally market moving events as US monthly jobs reports and 2012 Q4 earnings.
Meanwhile in currency markets, the EUR continued to rise versus most major currencies on both improved risk appetite in general and continued calming about the EU crisis in particular, justified or not.
Similarly, the JPY continued lower against most majors in continued anticipation of that the BoJ will announce bold new stimulus and JPY debasing measures after its meeting next week. The only question seems to be whether the announcement will beat expectations and prompt a further move higher in Japanese stocks and additional declines in the Yen, or if these trends will reverse on a 'sell the news' move.
Asset Prices Near Decade Peak, Fundamentals Aren't
In a note to clients, Societe Generale's bearish strategist Albert Edwards noted that "U.S. S&P rally from low looks spookily similar to 2007," saying that the S&P 500 is exactly 807 points above its March 2009 low of 666. From its 2002 low to its 2007 high, the S&P 500 moved exactly 807 points.
Meanwhile, besides the temporary boost from stimulus, the fundamental picture doesn't support decade high asset prices.
- The EU remains as big a threat as it's been in prior years. See here for details from our article last week.
- The same holds true for the US, which appears no more capable of a responsible resolution of its debt ceiling issues than it was when it scared markets lower in the summer of 2011.
- Meanwhile, global growth remains stagnant, the latest evidence of which is the World Bank's slashing global growth forecasts early last week. Not surprisingly, earnings results thus far have failed to lift markets.
Japan Fires Latest Shot In Currency Wars
While markets in Asia jumped late last week on reports suggesting that Japan is indeed preparing for a new round of mass money printing and Yen debasement, remember that such policies carry longer term risks of soaring borrowing costs and inflation that do enough harm to outweigh the benefits of the added liquidity from large scale money printing.
What To Do
Of course, how much the JPY suffers in the future relative to other major currencies like the USD and EUR will depend on whether the Fed and ECB match the BoJ's rate of money printing, among other factors.
The relative movements of these three and others will vary in the coming year, but the overall theme is clear. The Fed, ECB, BoJ, and other major banks are ready and willing to debase their currencies and the value of anything denominated in them. While one or more of these may show relative strength versus the others, the cost of hard assets and anything tied to them, like most of our major monthly purchases related to housing, food, energy, cars, major appliances, etc, will be moving higher, especially when overall economic and wage conditions improve.
Until they do, if most of your wealth is based in one of these at-risk currencies, use the time wisely and learn how to protect yourself and profit from their continued debasement. For the most recent collection of safer and simpler currency diversification solutions than commonly found in forex or overseas investing guides, see here.
Our take: per consensus market forecasts for 2013 that we recently published, there is limited upside for risk assets in 2013 compared to the likely downside. Likely catalysts for even just normal corrections include some combination of the following:
- A stagnant global economy
- Threats of periodic bouts anxiety from assorted of EU and US deleveraging, be it from Spain, Greece, Washington, or elsewhere
- Geopolitical threats in the Mideast or Southeast Asia
We provided some of our ideas for 2013 in part 4 of our forecast here.
Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.