The market rallied impressively last week for a number of differe... by Stefan Worrall

The market rallied impressively last week for a number of different reasons.

Stefan Worrall

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Earnings in Japan haven't been that bad, against very conservative guidance, which in retrospect was appropriate, i'm surprised there's been a failure to recognise more of the positives.

Results are coming from certain districts of the U.K. that actually are fairly skewed one way or the other, and there is huge volatility in the pound and in the yen. I think that sort of set the tone for the morning.

The market is in a state of significant anticipation. This is certainly crimping liquidity today because there is not a lot of substantial transactions going on in the market where you have this extraordinary volatile event.

There were extraordinary expectations that the Bank of Japan had to roll out something really big when they met in late April, but they didn't, since then I think there has been a realization that policy reactions in Japan are perhaps not to be expected anymore - big, market-moving policy reactions. Once the market begins to accept this, and to lower expectations for fireworks and bazookas, we can start the process of re-calibrating Japan based on its relationship with global fundamentals.

I think the market remains open to all possibilities right now, we're in a low-turnover state of anticipation over global events like the Brexit vote and the FOMC meeting but also with regard to domestic elements like a possible delay of next year's consumption tax increase and a possible snap election this summer. There's a lot of noise and no clear decisions.

I think it's hard to argue that the weakness we've seen in Japan this year has had to do with fears of a VAT hike and I think investors are much more focused on world events, right now, Japan is at the mercy of how China risks evolve, how expectations regarding Fed rate hikes evolve, and how the Brexit vote evolves.

Turnover has been bad in Japan and that's a function of a number of approaching events that could determine the mood going forward.

The rally we're experiencing today is based in part on the latest Brexit polls showing that the 'remain' votes have moved further ahead, the other factor is strong U.S. housing data and comments coming out of the U.S. that have increased confidence that there could be a June rate-hike.

The market's initial reaction to the GDP data was a slight strengthening of the yen, japanese policy makers could really use a sense of crisis to help justify ramping up fiscal stimulus or pushing out the VAT (sales tax) hike and a stronger GDP figure seems to undermine that narrative, though there is also some buoyancy from stronger U.S. inflation and increased expectations for Fed rate hikes.

We're seeing a double whammy of yen strength combined with Japan Inc's tendency to give very conservative guidance, so you have to acknowledge some uncertainty over how much capex will actually be impacted by the stronger yen because we're unsure just how much exaggeration we're seeing in dim earnings forecasts.

We're beginning to see that guidance from exporters have been on many occasions quite shocking, forecasting in some cases declines in profit of 20 to 50 percent in the coming year.

The yen has clearly shocked a lot of people with its aggressive strength this past week, but whether or not the negative sentiment is overdone won't be clear until we see the U.S. non-farm payrolls figures.

The market had clearly worked itself into a frenzy of expectations demanding that the BOJ take action, and in retrospect that looks like a misguided view that failed to recognise the dilemma that recent economic dynamics have presented for the BOJ.

It's an indication that this market is a bit frozen that it was shocked higher so easily by this news report.

The U.S. dollar remains doggedly below 110 yen, which will cap any notions of a sustained rebound, we're unlikely to see more conviction behind further yen strength or weakness until after next week's big Fed and Bank of Japan meetings, which means for now the market will remain influenced predominantly by micro- and near-term events, the most obvious being earnings.

We're seeing a perfect storm of the kind of negativity that feeds into people's fears and underscores the dangers lurking in a market where sentiment is very sensitive, it's unsurprising the yen's recent weakness has reversed given the sour macro sentiment arising from events like the natural disaster, the failure of the OPEC meeting to follow through on the encouraging promise it had shown, as well as smaller geopolitical risks like the impeachment going on in Brazil.

We've had a decidedly more bullish mood these last few days, with a bit of encouragement coming from oil prices, a bit of encouragement from China's trade data, and the yen is obviously playing a factor, these are all very encouraging signs that at the very minimum indicate that selling pressure has eased, and which hopefully mark some degree of more sustainable optimism. But that's hard to say for certain given how many people got caught on the wrong side of false dawns and dead cat bounces last quarter.

The market is now posing big questions about Abenomics. by Stefan Worrall

The market is now posing big questions about Abenomics.

Throughout March, Japan failed to respond to rallies and improving risk appetite seen in the U.S. and elsewhere, and while some were hoping Japan would catch up, the past few days have opened up the possibility that the rest of the world may catch down instead, the market is now posing big questions of Abenomics.

In U.S. dollar terms, Japan is significantly underperforming versus the U.S. and some of that may have to do with the fact that it's the end of a financial year and the end of a financial quarter that has been particularly harrowing, so much money in Japan is institutional and for that reason institutional frames of mind prevail, which can cause things to slow down at certain times of year.