Following up on the teaser I left on my last post, here is a little bit of catch-up on the Japanese markets since rather important technical levels are coming into play.
First of all though, if you’re reading this due to me applying for a job at your firm (and doing the first stage presentation yesterday), thank you very much for following up by visiting my blog after me sending my materials. It is much appreciated! If you’re simply here because you’ve gotten lost on the internet or someone told you that I write about anything of value, I’m sorry. It won’t take you long to realize that you’ll have more important things to do than reading about some finance ramblings!
Yesterday was all about the reversal of the dollar strength that had offered a lot of risk-on opportunities in the last few days, as it lowered all other currencies and lowered commodity prices, thus because of the higher volatility in commodities there was a net gap for exporters and importers alike to enjoy. This week has started to fray those connections, and reversal trading (particularly in oil) got traders a little bit scared and set the New York Stock Exchange opening up for a very, very volatile first few hours.
Here’s a slightly more updated chart (things are moving fast at the moment) of my teaser index in question.
Price has since gone even further north, last check was around 17 460.
Before we go into the rather obvious technicals, I would recommend having a closer look at the currency context in which this has happened:
Two days ago we had a test of the 61.8% Fibonacci level, which directly led to crossing the trend channel (looks familiar?) and testing the 50% Fibonacci level, 3.7 yen (3.04%) lower from the US$’s perspective. 3% on a currency in two days! That is impressive! The euro has been much more tame (slightly more than 1% gain) and the Australian dollar roughly in between, but these movements have been very, very telling of the general direction today of US$ weakness and this leading to general risk aversion and profit taking on positions aligned in that way. This of course is applicable to both the yen and Japanese stock indices as well. However, it sets Japan up for a particularly interesting technical crossroads. Read on past the jump for a brief summary, what I think will tip the scales either way, and where the other milestones on this random walk are.
What price action! The USD/JPY channel in particular has been crossed like it barely existed, and shown that the moving averages are rather strong. It does look like this, together with the Fibonacci levels, will play a rather important role in setting price for the rest of the month, as I have already speculated in. Prices above 118.9 will probably have a little bit of intermediate support from the peaks after the initial tests on whether the 118.2 level could be broken, and the 120 level will prove psychologically important, but it also serves as a middle point of the retraction from 121.85 to 118.15 (save a few pips) and this price action pinging around the Fibonacci levels thus enforces the power of the 120 round number to gather traders around it for both support and resistance.
The Nikkei 225 “behaves” better, staying generally more within a neatly allocated trend area while I’m worrying the USD/JPY might be breaking the proverbial walls. Breaking below the intermediate parallel trend line led to an immediate test below the trend channel overall, so this illustrates that volatility is higher these days and there is an elevated level of order flow on the futures contracts even when compared to normal US opening hours. The lower-sloped trend line going through the trend channel seems to have created a rather important neck line for a head-and-shoulders pattern, and we are now on the “right elbow” of that move, as far below the neck line as price was when the formation started. This would seem to indicate that the fall has ran its course, and that a more two-sided trading can now follow up by bringing price back into the channel.
Up or down from here?
On a more fundamental level, Bloomberg is tonight reporting on the plans for fiscal stimulus being thrown around inside Abe’s cabinet, likely to be dangled in front of voters as a last-minute electoral carrot. This stimulus would be roughly 3 trillion yen, or US$25 billion. It probably wouldn’t have much more than a symbolic effect, but as I believe that the general economy is looking up, exports will pick up during December and January, and that further data coming in on wages, investments and lending will probably support growth, “symbolic” might be all that is needed. Tohoku regional spending will be much needed, as will the extra cash at the bottom of the yen benefits handout ladder as these firms and people are likely to spend a lot more of their cash (if they’re already having a shortage!) than other economic actors. Hooray for velocity of money, this will probably help Kuroda Haruhiko get at least one good night of sleep before the election!
Timing will however be rather crucial. If it happens today (the 10th of December) or tomorrow, it might assist markets, but dropping it on the last market day before the election is probably unlikely to do much in terms of directional indications (given that I expect traders to not take positions meaningfully on Friday).
Ordinary data releases:
The most important data coming out of Japan this week is already summarized in the week-opening posts from Monday, but it deserves a little bit closer attention in view of the current market situation.
At Wednesday, 08:50 JST, corporate goods price and business confidence will be out, where I expect business confidence to be the major weather wane for tomorrow’s trade, but at 14:00 JST we’ll get November consumer confidence, which will likely steal the show. A reading above 40 will be rather important on the latter (October value of 38.9) to show that the commodity prices, general gains in assets, easier lending, delayed consumption tax hikes and the overall outlook is filtering on to the consumers to further assist in helping the velocity of money go up and become self-sustaining. Corporate goods prices are very likely to be down MoM (commodity link) but business confidence will be really interesting to see. The prior value around 12.7% for Q2 showed that businesses were looking up at things, and in light of increased capex and investments in Q3 it will be really interesting to see this data. Readings above 20 would probably help Q4 expectations quite a lot on the business side of the GDP equation!
October manufacturing orders are out on Thursday, the 11th of December at 08:50 JST. This will be a bellwether for what trajectory manufacturing is on “naturally”, ex-recent BOJ intervention. It is expected to fall 2.9% MoM, and given recent China/Germany import data I am willing to believe that this expectation is accurate. However, October machine tools were up rather strongly (36% YoY), so there is the opportunity for better than expected data. I will consider -2.0% a “strong” beat however.
Industrial production data for November, out on Friday, is not expected to be particularly important as this is October data revisions. Pretty decent for getting a breather and relax a bit, before the election will likely shake things up significantly.