Sour milk and Japanese-style “bad news is good news”

Poor leads from the US and European markets were predicting a fairly negative open for Asian markets today.

Source: Bloomberg

This largely held true for most markets, except for the Nikkei which had a “bad news is good news” rally on hopes that the Bank of Japan (BoJ) may step up stimulus next week. US dollar strengthened overnight off the better-than-expected US housing starts which saw most currencies in the region weaken.

The Japanese trade balance came in noticeably below expectations, which prompted a big rally in the Nikkei on expectations the BoJ may step up easing at its meeting next week. The unadjusted trade balance was -114.5 billion yen compared to consensus expectations of +87.0 billion yen, and the seasonally adjusted trade balance came in at -355.7 billion yen, compared to expectations of -63.4 billion yen. This is likely to be a further drag on Q3 GDP from net exports, and given the poor run of industrial production as well, Japan is likely to see a consecutive quarter-on-quarter GDP decline and enter a technical recession in Q3.

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The big question is whether the BoJ will do anything about it during its meeting next week. The prospects of further BoJ easing certainly took a hit in the wake of Finance Minister Taro Aso stating last Friday that, “the Bank of Japan may not ease policy further anytime soon”. One of the issues for the BoJ is that they already control almost 90% of the market in many government securities and they would have to turn to other assets.

This dilemma seems to be played out in differing moves in the yen and the Nikkei. The Nikkei rallied 1% on the move retesting its key technical level of 18400, while the USD/JPY only gained 0.14%. This could partly be due to speculation that any increase in Japanese QQE policy would involve the purchase of more Japanese equity ETFs.

The Global Dairy Trade auction price index fell 3.1%, the first decline since mid-August. This has tempered some of the Kiwi dollar’s gains and it fell back 0.6% against the US dollar. The Kiwi similarly weakened against the Aussie and the Japanese yen. However, much of the Kiwi’s recent strength had to do with expectations that the Reserve Bank of New Zealand (RBNZ) has ended its rate cutting cycle and will leave rates on hold at its meeting next week.

Despite the slight slip in the dairy price, Fonterra is forecasting a 5% cut in supply. Combined with expectations for a severe El Nino, this should boost the dairy price in coming months. The RBNZ is still greatly concerned about continued price inflation in the Auckland property market despite its introduction of higher loan-to-value macroprudential controls. Given this, the RBNZ should leave rates on hold next week and one would expect much of the NZD’s weakness today will unwind in the lead up to 28 October.


In the wake of the government’s nigh on wholesale acceptance of the Financial Services Inquiry yesterday it has been recognised that Australian banks must have unquestionably strong capital ratios and that mortgage risk weights should be increased. Nonetheless, both Malcolm Turnbull and Scott Morrison were very strong in their criticism of Westpac’s increase to its home loan rates yesterday. The market is waiting with baited breath to see whether any of the other Big Four banks will follow Westpac’s lead.

If this does occur, there should be a major downwards move in the Aussie dollar as the prospects of an RBA rate cut over the coming months picks up dramatically. A rate cut at the November meeting is still being given a relatively slim chance at the moment. However, the deterioration of Chinese and US economic data, the expected delay of the Fed’s rate hike into 2016, and prospects for a very severe El Nino driven drought over the coming months may increasingly weigh on the RBA’s calculus.

It was a fairly negative day on the ASX with the healthcare sector following its poor performance in the S&P 500 and the FTSE. The ASX fell through 5200 for the first time since 15 October, although there was clear support at this level as it bounced back above 5200.

The materials sector was the best performer on the index today despite the US dollar strength overnight, rising 0.85%. The solid performance in the gold spot price overnight proved to be another rallying cry for the ASX gold miners. Evolution Mining (EVN) and Northern Star Resources (NST) were the two best performers on the index, rising 9.3% and 9% respectively. Newcrest Mining (NCM) saw a nasty selloff yesterday as its production numbers came in below expectations, however even it was seeing buying today (+1.9%) as a rising gold price increases the value of its asset base.

BHP’s production results were largely in line with forecasts as it continued to see strong output, a slight lowering of oil related capex was seen as a positive and the stock in turn rose 0.9%.

But the index bellwether, the banking sector, saw heavy selling in the wake of the FSI and concerns that capital strengthening requirements will continue to weigh on the bottom line. Macquarie was slightly up on the day, but all of the Big Four were in the red with the sector as a whole down 1%.

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