Stocks extend losses amid tepid FX trading

Summary:

• Asian equity markets extend their losses following hefty falls on Wall Street

• Japanese core inflation misses estimates in November

• Japan’s Cabinet approves a record budget to ease consumers due to a planned sales tax hike

How low can we go?

Fear following the rate hike delivered by the Federal Reserve has yet to subside and as a result the US stock market extended its Wednesday’s losses yesterday. It resulted in a 2% drop of the Dow Jones (US30) and a 1.6% decline seen in the SP500 (US500) and the NASDAQ (US100). Risks regarding a possible government shutdown also added fuel to the flames. On Thursday the House voted to give President Donald Trump funds for his proposed border wall with Mexico, however, the spending bill is expected to be rejected by the Senate. The clock is ticking as a midnight Friday is a deadline to reach an agreement to avoid the government shutdown. Meanwhile, Donald Trump has said that we will not sign the spending bill without border funds. These developments coupled with weakish investors’ moods following the Fed’s meeting weighed on equities on Thursday. Asian stocks have also languished with the Shanghai Composite losing 1.3% and the Hang Seng (CHNComp) moving down by more than 0.6%. The NIKKEI (JAP225), which saw a bleak session yesterday, lost another 1.1%. It is worth summing up this month on Wall Street to realize how severe the falls have been so far. Namely, all three major indices have shed more than 10% each since the start of December and all are well below their 2017 closing levels. With the prospects of slowing economic growth and still tightening monetary conditions one may suppose that the stocks globally may struggle in the months to come as we might be only at the beginning of a larger bear market.

Looking at the NASDAQ weekly chart we may notice that the price is still struggling with its crucial technical level placed nearby the 38.2% retracement of the rally from February 2016. If the price closes below this line, it would lead to deeper falls toward another retracement in the vicinity of 5780 points. Source: xStation5

Japan’s inflation target still elusive

The sole noteworthy economic data released overnight was Japanese inflation for November which once again surprised to the downside. Annual price growth at a national level fell to 0.8% from 1.4% seen in October and matched economists’ forecasts. However, core measured came in lower than expected. The gauge stripping out fresh food fell to 0.9% from 1% whereas the super-core gauge excluding fresh food and energy drove lower to 0.3% from 0.4% - in both cases no change had been expected. It seems to say that the Bank of Japan remains still far away from its inflation target of 2% and therefore any rate hike is a pipe dream for the time being. Moreover, during his post meeting press conference yesterday Haruhiko Kuroda suggested that the BoJ is ready to act if the economy slows more severely playing down the fact that the Japan’s economy is already running at negative rates with the unprecedented quantitative stimulus.

Inflation trends in Japan remain weakish highlighting the hard task before the Bank of Japan to revive price growth to get its desired level. Source: xStation5

Meanwhile, Japanese PM Abe’s Cabinet approved today a record $900 billion draft budget for the next fiscal year. Such unprecedented budget is aimed at easing consumers due to a planned sales tax hike which is expected to come into effect in October 2019. Of course, the budget draft needs to pass the parliament by April. It shows that Shinzo Abe wants to avoid a repeat of the economic downturn caused by the April 2014 sales tax increase to 8% from 5%. In terms of Japanese yens the budget will be 101.5 trillion JPY and about 2 trillions will be specifically for steps to ease the impact from the higher sales tax. We wrote earlier about this mentioning that the government plans to spend more on infrastructure as well as to fund shopping vouchers to help low-income households. On the back of better tax revenue estimates the Ministry of Finance plans to cut JGBs issuance by 4.8 trillion JPY in the 2019/2020 fiscal year. If so, it would be the night consecutive decrease of the issuance of bonds and it would lower the debt dependency ratio to 32.2%.

The USDJPY broke through its support trend line on Thursday. As a consequence, the price is expected to move south in the nearest future with its first more notable target at 108. It accords with our broader view regarding the US dollar. Source: xStation5

In the other news:

• US Defense Secretary Jim Mattis has resigned pointing to differences with Donald Trump over the treatment of allies

• The US has announced that it will withdraw 7000 troops from Afghanistan, the number accounts for a half of the troops deployed in the country

• Oil prices rise 0.6%, US dollar trades subtly higher while the US 10Y yield trades at 2.806%