Japan slips into recession

It has been a lively start to the week in Asia with plenty of action in some of the key regional markets. 

Source: Bloomberg

Japan’s GDP release has been a key turning point for the session as optimism swiftly waned and traders took profits on equities and USD/JPY. This week has been pinned as key for Abenomics and so far it certainly has not been a good start.

Q3 GDP released this morning showed Japan actually moved backwards at an alarming rate, despite all the effort that has been made over the past couple of years. GDP annualised came in at -1.6% q/q (versus +2.2% expected) and down 0.4% quarterly (versus +0.5% expected). Compositionally the numbers were also weak and this essentially saw Japan slip into a recession.

The theory heading into the data was that a weaker-than-expected reading would see Abe delay the sales tax hike by around 18 months and call a snap election. This was deemed as a positive outcome for equities. However, very few imagined that this reading would disappoint by quite a margin and this has spooked investors.

Consumption tax likely to be shelved

Whilst many felt Japan was still off target, optimists felt at least it remained close enough to its target and essentially hit a sweet spot where further action would be required and things were still ticking along. The miss from today’s reading is likely to be a ‘back to the drawing board’ scenario and this brings uncertainty. As a result the Nikkei pulled back significantly and USD/JPY’s run also stalled.

While the delay to the sales tax hike now seems to be a done deal following these figures, with some even feeling it could be postponed by over 18 months, the election remains debatable. The fact the Japanese public has mixed feelings about Abenomics could make it harder to call it on the back of this disappointing GDP reading. Unless Shinzo Abe can come to the table with new ideas and convince the public his goals are still achievable, it seems opposition to his methods is only likely to grow.

It seems market consensus is for an election to be called and for the expert tax panel to shelve the consumption tax. Don’t forget we also have the BoJ meeting this week where no change is expected after the October surprise decision. BoJ Governor Kuroda has insisted more will be done if need be and it’ll be interesting to see how this latest data impacts policy.

China pulls back on bank concerns

Elsewhere in the region investors have been eyeing the Hang Seng and Shanghai Composite closely on the first day of the exchange link. There has been much more business north bound, with Hong Kong investors taking up around two thirds of the daily quota while southbound activity has been less than 10%. As a result the Shanghai Composite is firmer, while the Hang Seng is struggling.

Shanghai Composite gainers are in consumer stocks, industrials and healthcare names. However, financial stocks have given up ground on the back of data (non-performing loans) showing major banks are experiencing a spike in bad debt ratios. This has since weighed on the Shanghai Composite and Hang Seng and spoilt the party. Regardless of the pullback, it seems investors are excited about the exchange link and this should be beneficial for the region as China presses on with its reforms. China property prices, due out tomorrow, are likely to be pivotal to tomorrow’s trade.

Europe focuses on the ECB

Ahead of the European open we are calling the major bourses weaker after having a fairly solid session on Friday. ECB President Mario Draghi delivers his testimony on monetary policy before the Committee on Economic and Monetary Affairs later today. These events tend to touch on monetary and fiscal policy working together to achieve results and given the complexities of the eurozone this is likely to be a dominant theme.  

Mr Draghi speaks again on Friday and a raft of ECB members will be speaking through the week.  The single currency has been quite firm through Asia and volatility is likely to ramp up this week with the ECB active on the wires. On the calendar we also have ZEW economic sentiment and a raft of manufacturing and services PMIs.  

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