Japan rallies on Tankan report

Japan is outperforming the region today with investors reacting to some positive signs from the Tankan report.

Japanese flag
Source: Bloomberg

The report showed Japanese companies lifted capital spending by 7.4% in Q2, well ahead of the previous reading of 0.1%. This large all industry capex reading was also ahead of estimates of around 6% and saw a disappointment manufacturing sentiment reading largely ignored.

An issue I have been highlighting recently is the fact that prices are rising significantly in japan, well ahead of wage growth and this is putting pressure on household spending. The recent sales tax hike impacted sentiment from that perspective and this has been a key issue for households. To counter this, Japan’s officials are hoping companies use their cash holdings to lift wages and boost investment.

There has been plenty of talk recently around companies using cash for buybacks and this has been one of the key factors underpinning Japanese equities. Labour cash earnings also showed some positive signs coming in a touch ahead of estimates at +0.8%. With some positive signs emerging from the data releases, the Nikkei rallied around 1.5% today. This was despite a relatively sidelined USD/JPY, which continues to be capped by the 101.50 level.

China activity picking up

There were also some positive developments out of China with the manufacturing PMI reading coming in at 51, as expected. This confirmed that China activity is picking up following recent measured stimulus steps taken by the government. Premier Li recently confirmed China will achieve its growth target and dismissed fears of a hard landing. Many would have expected to see the reading out of China prompt risk higher but the reaction proved to be quite muted.

AUD/USD actually lost a bit of ground on the back of the data and heading into the RBA decision. As expected, the RBA left rates unchanged at 2.5% for the 10th straight meeting. While the statement was largely unchanged, the RBA did add commentary on the AUD. The RBA said the AUD is offering less assistance than it might in achieving balanced growth in the economy. However, the ‘period of stability in interest rates’ was maintained and this was enough to see AUD/USD pop higher and test April highs.

While the RBA is concerned about the historically high AUD, it is clear they are not looking at taking action anytime soon. Perhaps Glen Stevens’ comments on Friday will offer a bit more insight on what to expect from on that front.

Sterling looking poised for further gains

Looking ahead to European trade, we are calling the major bourses modestly firmer at the open. On the economic calendar we have some manufacturing PMIs for Spain, Italy and the UK. We also have Germany and Europe’s unemployment rates to look out for. Even more interesting will be watching the sterling after it traded at a seven-year high against the greenback in US trade. GBP/USD had been threatening a move higher for a while after a long period of consolidation around 1.7000. The pair finally managed to break June highs which resulted in a breakout, with the pair rallying to 1.712. With cable now trading at its highest since October 2008, it looks poised for further near-term gains. The question now is how far can the pair run following this breakout. I would prefer to puy pullbacks into 1.7000 as there is an uptrend support which kicks in around there. Data out of the UK is limited but there are plenty of potential market moving events on the USD side of the equation.

The manufacturing theme continues into US trade and perhaps the ISM manufacturing PMI reading will offer some direction for the USD. The US dollar broadly lost ground, with the dollar index slipping below 80 for the first time since May. Traders will be looking to see if this slide can be arrested in the near term.

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