Japan leads Asia on stimulus bets

With the much-anticipated Jackson Hole symposium out of the way, markets are left to stew over comments made by key central bankers. 

Japan
Source: Bloomberg

While Fed chair Janet Yellen was the headline, ECB president Mario Draghi and BoJ Governor Haruhiko Kuroda also made an appearance.

Although there were no surprises from Janet Yellen’s speech, the fact she didn’t go above and beyond what we already know was construed by some market participants as less dovish. Yellen did her best to deliver a neutral/balanced view, but the bottom line is the timing of any rate moves will be data-dependant.

Judging by what we’ve been seeing in the past few months, the US economy seems to be evolving faster than the Fed anticipated. If the trend continues, we can expect earlier lift off. For now, though, analysts are still skewed towards the middle of next year for a move in rates.

As QE comes to a halt in October, analysts are now tipping the September meeting as pivotal for markets. Details of an exit strategy, along with major changes to forward guidance, are anticipated.

Greenback generating some interest

The US dollar will remain a key talking point this year. There are already calls for the beginning of a USD bull market taking place, particularly as key currencies such as the euro and yen struggle against it.

One of the dominant themes in Asia this week is likely to be strength in the Nikkei, aided by Kuroda’s comments from Jackson Hole. BoJ Governor Kuroda still feels the 2% inflation target is achievable and said they may have to pursue an aggressive easing policy for some time. The important point here is that this shuts down the sceptics who were beginning to feel the BoJ has done all it could.

We have already seen the Nikkei outperform the region today and the theme could continue this week – particularly if USD/JPY remains bid. If data shows further signs of slack in Japan, we could see additional stimulus being priced in.

Nikkei outperforms the region

Developments from the weekend have also prompted USD/JPY higher as it’s now trading at its highest level since January 2013. This week is also fairly significant for Japan as we receive a raft of data on Friday. We’ll get the latest reads on inflation, employment, industrial production, retail sales and housing starts. Any signs the BoJ is drifting away from its goals will most likely ignite calls for further stimulus.

Inflation will be especially vulnerable once the impact of the sales tax hike wears off. Apart from Japan, the rest of the region is relatively subdued, with the ASX 200 and China struggling. It’s been a relatively light day on the data front but later in the week we get quarterly readings on Australia’s construction work and capex. Additionally, we also have China’s industrial profits to look out for.

Europe in for some gains

The ECB’s Mario Draghi made headlines after suggesting further stimulus could be on the way. He feels action may be needed to boost demand in Europe, and this will see markets start to price in probability for further stimulus in the near term. The result was a drop in the euro today and is also likely to support European equities.

Looking ahead to the European open, we’re calling the major bourses firmer with the FTSE closed for a bank holiday. EUR/USD traded to a low of 1.3184, its lowest since September 2013. While the pair has reclaimed the 1.3200 handle, it still looks vulnerable to near-term selling. Needless to say, a weaker euro is actually a positive for European markets.

I will be watching the DAX closely for a potential recovery this week, after having cleared the 38.2% retracement (10,048) of that big slump from its recent record highs to lows just below 9000. Later today we have the German Ifo business climate report, while in the US we have new home sales data. 

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