Nikkei in biggest rally since 2008, up 7.7%

The Day So Far

The Japanese Nikkei posted its largest single day rally since 2008 as markets responded to bullish comments from Prime Minister Abe, who also promised to cut the corporate tax rate by 3% to 30% by the end of 2016. Although this doesn’t exactly bring the rate down to levels where it is competitive with many of the European countries (for example, the UK has a corporate tax rate of 20%), it indicates Abe’s willingness to press on with reforming the economy. The Nikkei is now up some 1000 points from yesterday morning’s low. European equities, like yesterday, have fed on the bullish Asian session and the solid finish to the US session, the Dax breaking the triple top around 10,385; this should provide good support for today if equities retrace some of their gains later in the session.

Today also marks the start of the media ‘blackout’ imposed on FOMC members a week prior to next week’s meeting. We are entering what is likely to be a quiet period as investors draw breath before the meeting. The World Bank’s Chief Economist weighed in on the debate last night, urging the Fed not to raise in September for fear of causing ‘Emerging Market turmoil’. Markets are rallying currently, partly in expectation that the Fed won’t raise rates; however, this rally is slightly self-defeating, because if the Fed has moved to a ‘market-based’ institution from a ‘economy0based’ and is looking to shock the markets when they are strong, rather than at, say, the 2015 lows. We continue to look for fixed income weakness going into the meeting; indeed, t notes are selling off sharply this morning once again, making new lows for the month.

The Afternoon View

This afternoon’s calendar is on the light side, with only the JOLTS Job Openings (15:00 BST) really the only data point of note. Therefore, we are looking for cautious markets, as traders are reluctant to take large positions in the lead up to the eagerly-anticipated meeting next week. As a result of the US public holiday, the usual DOE inventory release, usually every Wednesday, will now be taking place tomorrow, further depriving us of something to set the pulses racing this afternoon. We are reluctantly short equities, in fact we are short across all four of the markets we cover, but would advise against expecting the kind of big moves seen recently given that we are now beginning the ‘calm before the storm’ just a week away from the FOMC meeting.