Japan leads on election and sales tax

Japan has continued to be a standout performer in Asia, with equities extending gains on optimism a snap election and a delay to the sales tax hike will be announced.

Japan Stocks
Source: Bloomberg

Yen crosses and Japanese equities have proved to be the gift that keeps on giving after recent gains. The initial move was triggered by the BoJ’s surprise easing and the momentum has just remained buoyant. Reports over the past couple of days have suggested the government is planning to postpone the consumption tax hike and call a snap election in December. It seems the consumption tax hike is a key factor for elections, which are currently scheduled for 2016. Pushing it back will be a positive for Abe’s campaign.

There have been reports that a sales tax hike will be pushed out as far as 2017 and this would be extremely bullish for equities. This news saw USD/JPY surge through ¥116.00 and in turn saw the Nikkei trade at a seven year high. Some of these gains reversed through Asian trade after Japan’s Chief Government spokesman denied reports around the sales tax hike delay. Yoshihide Suga suggested the LDP is not prepared for snap elections and also denied any media reports on the sales tax-hike delay. The decision on the sales tax hike will be made after assessing GDP figures and analysts feel these numbers will fall short of targets. However, I feel any dips in USD/JPY and the Nikkei will continue to be a buying opportunity. We often see these situations where officials deny reports, only to be confirmed later down the track.

Miners weigh on the ASX 200

It’s been a different story for the rest of Asia, with China struggling and the ASX 200 retreating to a two-week low. The ASX 200 got off to a decent start but pressure in the major miners proved too much for the bulls. We had seen some consolidation for the ASX 200 between 5500-5550, after a period of gains as investors geared up for bank dividends. However, now that the main banks have traded ex-div, support has given in and investors are in no rush to keep pushing these banks higher. Without that support, it’s up to the materials to keep the momentum going. This doesn’t seem plausible given fundamentals for the miners continue to deteriorate with metals struggling. Analysts have grown increasingly bearish on the iron ore picture and the major brokers have been running a scenario analysis for the pure plays. Atlas Iron and Fortescue Metals have been the ones most talked about recently, with the former plunging over 10% today. The losses were triggered by a Citi report which suggested the stock is at significant balance sheet risk. Following Citi’s price forecast revisions, the broker feels AGO will not be able to repay its US$270 million facility in 2017 from cash flow. While Citi feels FMG is the fittest of the pure plays, the stock still dropped below $3 today and a close below this level leaves it facing next support at $2.85. With most analysts now switching their calls for a rebound in iron ore this year, investors are likely to remain pessimistic on the plight of the pure plays. Should this weakness in the banks and materials persist, then the ASX 200 could be in for a deeper pullback.

UK inflation in focus

Ahead of the European open we are calling the major European bourses modestly weaker. Focus will switch to the sterling with a raft of releases due out of the UK. On the calendar we have the BoE’s inflation report, jobs data along with a speech by BoE Governor Mark Carney. The sterling has been under significant pressure recently in a move that started when the Scottish referendum was building momentum. GBP/USD is just holding onto the $1.5900 handle but this could be short lived as analysts are expecting downward revisions to near term inflation projections at a minimum. Conditions have been somewhat softer in the UK and this suggests the BoE could have to downgrade its hawkish tone as far as hiking is concerned. Key support comes in at $1.5722 which is the 61.8% retracement of the July 2013 to July 2014 rise. In the US, Fed members Plosser and Kocherlakota will be on the wires while the bond market reopens after yesterday’s break.

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