The markets are running pretty well as of late, can’t argue with that!
The Dow is pushing 13 000, the S&P 500 touching 1 370, European indices slightly behind but still up, the Shanghai Composite firmly breaking its channel range (wonderful what a little economic downturn worries can do for policy easing expectations!) and if we’re talking levitation the late king of them all is of course the Nikkei 225 with a 14% rally so far this year. Naturally, this is off the yen being down 5.5% in the same period in US$ terms, and 9% in euro terms!
As is alluded to there, of course this also means that the euro and tangentials (scandies, pound, etc) are also up by nearly 4% against the US$. Superficially, it’s all looking like a classic risk-on rally set on by the Greek problems finally approaching a solution. Or… ?
Well, this Wednesday when the news were out, there wasn’t too much of a pop… it seems like this is mostly a late week effect so far, and a little bit more is needed to truly check this out. Did everyone realize first on Thursday and Friday what had happened? Japan is of course led much more by the Bank of Japan specifying its inflation target for the time being at 1%, asset purchase program increase by 30 tn yen, and traders already fleeing the currency before the announcement for fears of government currency intervention around the 1/76 US$ highs. 1 + 1 + 1 = Momentum! As usual, pull a little bit at the strings and the movements seem to fall apart more and more. Good data coming out of the US late in the week could have contributed to the push, but that’s not exactly… news, although German business confidence was unexpectedly upbeat.
Commodities are higher as well, of course, pushing towards the year highs, and gold in a particularly interesting position from my perspective. Other commentators have been tracking silver more closely, and it’s definitely worth keeping your eye on, but for those that read my blog closely you will not be hugely surprised to see the platinum group metals outperforming in short-term relative terms, although it does maintain a negative premium to gold still (!). My main question is why commodities are not even higher, given the currency complex realignment, and probably most importantly the total risk-on mode seeming to be everywhere in the market.
One reason why might be that there is one commodity above all that has been rising lately, and that I’ve let slip from the radar: Oil. Geopolitics is the “gold” part of “black gold” these days it seems, and tensions in Iran plus improving data and upbeat US traders seem to imply a coming blowout in oil. Now, how good is this overall? Not very, most likely. Anyone claiming higher oil prices to be good for the US consumer and related confidence should be shot, it’s not as important in Europe, and vastly less important in Asia, although it is still a factor for economic growth everywhere. One telling sign of just how important the oil factor was in isolation for the commodity complex is that the AUD/USD barely budged all week! It’s sitting and chipping in at the 1.07 – 1.08 levels ever more diligently, indicating that people that are willing to sell it short are not necessarily in power, but that bulls are also wearing a bit thin before more market-moving news are out. Still, a consolidation here is pretty golden, and gives a lot of power to any sustained break above the 1.08 line.
A quick note on currencies in general: they do look like someone placed them in a cluster on a chart, and put a firecracker in the middle, letting them fly hither and dither without abandon, and it got worse the later in the week we got. Exercise caution.
Comments on risk assets, valuations, and what I’m expecting for the start of the week:
Though, the risk push on Friday, particularly in the late US trading hours, indicates that there is running room tomorrow in the entire “new risk concept” complex save the yen. Thus, include gold in your expectation of uppers, and given how vigorously China broke out from its range, things there ought to be looking up if more policy easing is coming. if data keeps looking good, I’m holding copper and nickel and companies exposed to them in pretty high regard, mostly because of the industrial growth story, and if it is indeed a confidence data driven story out of Germany and jobs in the US are looking up, this is a surefire position to hold. Though, the euro rally in AUD terms is perhaps the best indicator of short-term risk differentiation. It could be because of the differential of news, or in the technical level for the AUD/USD, but it does represent an uncanny additional risk factor going into tomorrow’s trading.
From a valuation standpoint, there seems to be ever more reasons to be very careful with what you’re picking. shanghai composite is pushing slightly above 13 P/E, while Hong Kong is still in the 9-10 range, and Singapore is just above 8! Since China looks technically to keep going well, and both of these markets are very tied to them, I have a very hard time seeing how they will fail to increase nominally. The main question is more that of a proportional catch-up. Meanwhile, Taiwan is pushing a fairly rich 18 P/E with the TWSE index coming up right around 8 000 (keep in mind, when Ma Ying Jeou was reelected, it was 10% lower)! Now, if it is as reliant on the rest of the world economy as is often suspected, and particularly on China, then this might be your top play to catch initial stock-market euphoria. Investors are normally pretty dumb creatures and P/E doesn’t matter if momentum is there. In fact, rich valuations seem to make the common person more interested in getting in, not less. Best proportional velocity out of the indices? I’m all for KOSPI (P/E ~17) or TWSE here, but wouldn’t put any money I hope to withdraw after until after the summer vacation there.
Of course, the Nikkei is in a world of its own. 25 P/E? Goes to show how much the currency hurts the nation. Would I like to put my money there? Not for multiples expansion, surely, but if the fundamentals improve as much as one could hope, then it would make a lot of sense for local investors to go in. If the Bank of Japan succeeds in causing inflation around 1%, the sub-1% off 10Y JGB’s isn’t really particularly attractive, especially if you can cause domestic company earnings growth simultaneously with increased export profits, lifting all of the stock market. I do not necessarily forecast multiples expansion for the Nikkei, but I hope that the fundamentals (accommodating budget from the government in reconstruction, and accommodating policy from the central bank, plus signs of economic recovery) would make the country lean towards possibly much higher growth in the year ahead, thus allowing one to profit even under a multiples contraction scenario. Can growth and printing save Yoshihiko Noda enough face to drive through tax increases and pretty much quell the budget monster, making sure that this process can be continued? Well, fingers crossed. If that happens, with any luck we’ll see the momentum on the stock market outpacing that down in the currency, and attracting foreign investors as well.
To me it looks like the indices will keep going strong. Nikkei closed before the last major push upwards of the US$, and similarly everything else was closed while the euro and directly used industrial commodities and energy were up strongly in the New York session. Euro indices are coming back miraculously around 15 P/E, and this pretty much leaves Asian indices in a risk-reward lag if you ask me. Last weeks trading of the Hang Seng also looked strong for several reasons. The weekly candlestick isn’t much to cheer for (bearish, filled, and with no wick on the upside) but looking on the dailies a bit closer, there was clearly a lot of rejections off the 21 300 lows, and price never created a firm downwards move after the Monday trade, with two bullish pinbar rejections off the bottom (Tuesday, Friday) and two open-to-close rallies. Coming tomorrow: a 21/252 Day SMA bullish cross! Time to put on the China trade?