Abenomics is a self-defeating strategy

Elevated Bond Yields weigh on Risk Assets
By Brenda Kelly

For a solitary moment, European indices turned green earlier this morning but the upside moves in Bund yields through the 1% mark has acted like a yoke on the shoulders of the CAC and the Dax. The FTSE is only showing marginal gains in early trade with supermarkets leading the charge.

The usual Greek worries are certainly not helping and we appear no closer to a resolution than a week ago.

A sixth straight quarter of falling sales for Sainsburys; the stock moved higher as the fall in sales marginally beat some of the more pessimistic market estimates. Management has pointed toward continued food deflation and the ongoing supermarket price war as the causes. Supermarkets just aren’t able to eke out the margins they once did in frontline food lines. Positive notes come from improving clothing sales and strong growth in the convenience store arm. The stock has been range bound this year between 240p and 280p, and little in this trading update suggests it will escape that range.

Nevertheless, the 3% move to the upside in Sainsbury shares has helped to drag the sector higher along with it with Morrison’s and even Tesco catching a bid this morning. Given the elevated interest in short selling this sector of late, it’s very possible that much of the bounce can be attributed to position unwinding. Fundamentally, nothing appears to has changed.

Streamlining and restructuring is the becoming a very common theme in the banking sector and investors have, initially in any case, reacted much more positively to Standard Chartered’s pledge to strengthen its finances with the shares rising 1.93% compared to HSBC which is still under the cosh this morning losing an additional 0.9%.

UK macro data is a mixed bag with monthly and annual manufacturing output failing to meet expectations while industrial production saw a rise of 1.2% yoy against the consensus for a rise of 0.6%. The pound remains capped by the $1.55 level and has also lost quite a head of steam against the euro over the past number of days. Later the NIESR GDP estimate is released. The most recent quarterly forecast projected GDP growth of 2.5% in 2015 and 2.4% In 2016.
Last year’s Mansion House speech managed to surprise cable traders as a rather hawkish Carney emerged on the day. Most recent rhetoric from the BOE governor was fairly balanced in relation to monetary tightening but if he can surprise us once, he can certainly do it again.

The Dow is slated for a better start – we expect a 46 point gain on the open to 17811.

Abenomics is a self-defeating strategy
Ipek Ozkardeskaya

BoJ’s Kuroda finds the yen weak enough following the 65% depreciation against the US dollar since end of 2011, when the PM Abe came into the power and put in place the unprecedented three-arrow economic boost package. The package included a massive cash injection in the economic system to fight the long lasting deflation by, moreover, enthusiastically doubling the inflation target to 2%. The target should be reached by the first half of 2016; we are only half way through, according to Kuroda.

Sadly, the Abenomics is a self-defeating strategy. While the first arrow of Abenomics has been an irrefutable success, the second and the third arrows, which consist of fiscal and structural reforms, remain the main downside risks to Japan’s recovery. The first and the only attempt on the fiscal leg jeopardised the progress in inflation. As soon as the sales tax has been hiked from 5% to 8% in April 2014, households drastically stopped spending pushing Japan to an undesired disinflationary phase. To mask the damages, the government backed up quickly and the BoJ expanded the monetary stimulus. Yen hit 125 mark against the US dollar. The question is how Japan will finance the economic recovery with such a weak yen.

The weaker yen has perhaps been excellent for international companies. Happy coincidence, Toyota Motor Corp. share value increased from 2300 yen to 8741 yen, almost fourfold, since the launch of Abenomics. For small caps however, the rising cost of the dollar has not generated the same enthusiasm. The recent months have witnessed rising voices against the PM Abe. Although victorious of the snap elections, the popularity of the PM Abe’s team leaves place to a meagre sentiment of a deadlock.

Japan needs fresh strategy, besides injecting massive amount of cash in the economic system. In his Diet testimony, BoJ Governor Kuroda’s testimony delivered a clear message: no need for additional stimulus, the yen is already weak on real effective exchange rate basis. Following these comments, the probability of an additional monetary stimulus at June 19th monetary policy meeting is practically nil.

This does not mean that in the mid-long run, the USDJPY will not return back to levels above 125.00 because the strength in the USD leg will almost be granted as the Fed starts hiking rates. In the short-run however the USDJPY tumbled down toward the Ichimoku’s baseline (122.38). There is room for further advance to the cloud (120.18/119.59).