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In the wake of the European Central Bank (ECB) and the People’s Bank of China (PBoC) announcements, markets rallied strongly. They have largely kept their gains today, and looked primed to extend them if the Fed definitively pushes out its first rate rise into 2016 and the BoJ steps up its monetary easing.
The big question in the markets at the moment is whether the BoJ will follow the ECB and the PBoC in stepping up their Quantitative and Qualitative Easing (QQE) program at their meeting on Friday 30 October.
It should be noted the BoJ has given no indication that they will expand the QQE program, and Finance Minister Taro Aso recently explicitly stated that QQE would not be expanded. Yet the case for them to do so is highly compelling. Japan’s recent run of industrial production and export data indicate that Japan is likely to see GDP contract in again in Q3, entering a technical recession. The whole credibility of Abenomics would be brought into question if the BoJ sat on their hands and did nothing as Japan went into recession and the 2% inflation target was left flapping in the wind.
In the wake of the ECB, the PBoC and the Fed likely pushing their dot plot expectations for the rate hike back, there is a strong move to monetary easing globally at the moment. This would provide maximal impact for the BoJ should they choose to ease this week.
These arguments seem to be finding traction in Japanese equity markets and the yen of late. The Nikkei has been finding some solid traction since the start of October with 56% of companies on the index now trading above their 200-day moving average. This current move in the 200-day MA is interesting as it has clear similarities to those in Q4 2012 and Q3 2014, rallies which both preceded BoJ monetary stimulus.
China’s Fifth Plenum begins today and the key elements of China’s 13th Five Year Plan is expected to be fleshed out over the four-day meeting. A key issue will be China’s slowing growth and how to manage the ongoing rebalancing from the debt-laden mostly state-owned secondary sector to the robust private sector dominated tertiary sector.
This transition was underlined with the release of China’s slowest quarterly GDP number since 2009 last week. The People’s Bank of China (PBoC) also announced widely expected cuts to the interest rate and reserve requirement ratio (RRR) on Friday. These are not only needed to support growth, but are necessary to combat China’s steady capital outflows and associated tightening of money supply. As China’s foreign exchange reserves continue to deplete, consistent with more outflows than inflows in China’s capital account, rate cuts are needed just to keep inter-bank rates at reasonable levels. The impetus to see much of a pickup in growth needs to also come from the fiscal side. This does somewhat explain the mutedness of Asian markets today, despite the strong futures rally late on Friday.
This fraught debate over the future vision for China will be in full play this week, and will centre on the growth target for the 13th Five Year Plan. If the 7% annual growth rate is ditched, which any sensible observer can see is necessary, then this is in turn an implicit abandonment of secondary sector driven growth. The removal of the 7% growth target will mean a significant reduction in state-support to SOEs and heavy industry-laden provinces ie the North and North-East.
Understandably, with jobs, money, power and influence on the line, there will be some fierce behind-the-scenes wrangling over the wording and targets at the plenum, which has been ongoing since the summer’s Beidaihe meeting.
The other important element to this meeting is the personnel manoeuvring in the lead up to the all-important leadership reshuffle at the Party Congress in 2017. The Party Congress is held every five years and it is the mid-point between them when the key personnel changes are decided. By seeing which leaders are elevated to the 25-member Politburo in 2017, it will be possible to discern who is being positioned to take over from Xi Jinping and Li Keqiang at the apex of the party-government system in 2022. Given Xi Jinping’s aggressive attacks on other factions through the corruption crackdown, the prospects for officials associated with Hu Jintao’s ‘Youth League’ faction or Jiang Zemin’s ‘Shanghai clique’ look fairly dim.
The ASX has been rallying strongly, with futures even touching 5400 during the US late Friday session in the wake of the Chinese rate cuts. There does seem to be some strong upwards momentum in the ASX with the percentage of companies above the 200-day moving average reaching 52% from a four-year low of 30% at the start of September. If you look over the past couple of years, every time this measure has consistently rallied over 50%, the rally usually continues until at least 60-70% of companies on the index are trading above the 200-day moving average.
There is now the fundamental and technical foundation that could lift the ASX back to its 5600-5700 level before the August sell off. If we do see the Fed pushing their dot plots back for when they would expect to see the first rate hike and the BoJ coming to the monetary easing party this week, then that could provide the impetus for a broad based global equity rally. The ASX would be lifted alongside this increased liquidity in the markets.
The big question for the ASX at the moment is which sectors are going to see the bulk of that lift? One way to work this out is to see where the momentum has been over the past couple of weeks.
The energy sector has easily been the best performer, with stocks rising from the recovery in oil prices to the US$45-50 level and the heated M&A activity in the sector. Drillsearch (+64.5%), Santos (+38.5%) andBeach Energy (+31.4%) are all within the top six performing stocks over the past month.
Africa-focussed uranium miners Paladin Energy (+34.3%) and Syrah Resources (24.7%) have also seen strong gains. Although Syrah is also focussed on copper, which has similarly boosted Sandfire Resources (21.7%).